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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2004 Commission File Number 000-50642  MEMORY PHARMACEUTICALS CORP.  Delaware
    
    04-3363475(I.R.S. Employer(State of incorporation)
    
    identification number)
 100 Philips Parkway
Montvale, New Jersey 07645
(201) 802-7100
(Address, including zip code, and telephone number,
including area code, of registrants principal executive offices)  Securities registered pursuant to Section 12(b) of the Act:
None  Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.001 par value 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  Yes     o  No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form  10-K.  þ Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2): o þ
 The aggregate market value of the voting stock held by non-affiliates of the registrant
as of June 30, 2004 was approximately $137,988,587 (based on the last reported sale price on the
NASDAQ National Market on that date). As of March 28, 2005 the
registrant had 20,746,923 shares of common stock, par value
$0.001 per share, outstanding. The registrant does not have any non-voting stock
outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants Proxy Statement for the 2005 Annual Meeting of Stockholders,
which is to be filed subsequent to the date hereof, are incorporated by reference into Part III of
this Annual Report on Form 10-K.




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MEMORY PHARMACEUTICALS CORP.
2004 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PagePART I
    
    1Item 1. Business
    
    1Item 2. Properties
    
    33Item 3. Legal Proceedings
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    33PART II
    
    34Item 5. Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
    
    34Item 6. Selected Financial Data
    
    35Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    36Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    45Item 8. Financial Statements and Supplementary Data
    
    46Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    64Item 9A. Controls and Procedures
    
    64Item 9B. Other Information
    
    64PART III
    
    65Item 10. Directors and Executive Officers of the Registrant
    
    65Item 11. Executive Compensation
    
    65Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    65Item 13. Certain Relationships and Related Transactions
    
    65Item 14. Principal Accountant Fees and Services
    
    65PART IV
    
    66Item 15. Exhibits and Financial Statement Schedules
    
    66EX-10.40: AMENDMENT TO STRATEGIC ALLIANCE AGREEMENTEX-23.1: CONSENT OF KPMG LLPEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONS




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This Annual Report on Form 10-K, including the sections labeled 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 Annual Report on Form 10-K. 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. 
 PART I 
 Item 1. Business. OVERVIEW We are a biopharmaceutical company focused on the discovery and development of innovative drug
candidates for the treatment of a broad range of central nervous system (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 (MCI), and also include certain psychiatric disorders such as
schizophrenia and depression. It is well recognized that memory loss and other cognitive
impairments are key characteristics of Alzheimers disease and other dementias. It is less widely
recognized, however, that memory loss and other cognitive impairments frequently occur in
psychiatric disorders such as schizophrenia and depression. Although therapies for the treatment of Alzheimers disease, schizophrenia and depression have been
available for a number of years, many of the approved drugs for these disorders are not effective
in a large number of patients and can produce significant side effects. Our potential CNS therapies
are designed to address biological targets within the cellular pathways that are currently thought
to be critically involved in memory formation and other cognitive functions. We believe that this
approach could be effective in treating many major neurological and psychiatric disorders. We also
believe that the relative specificity of these biological targets provides an opportunity to
develop drugs with reduced side effect profiles. Through pioneering research conducted over more than 30 years, Nobel Laureate Dr. Eric Kandel, one
of our scientific founders, identified critical cellular pathways and biological targets involved
in memory formation. This research, which was published in the 1990s, served as the cornerstone of
our scientific foundation. In order to identify and optimize promising drug candidates quickly and efficiently we combine:  Ø
    our extensive knowledge of the pathways we believe are involved in memory formation and other cognitive functions;Ø
    our understanding of neurological and psychiatric disorders;Ø
    an interdisciplinary drug discovery and development approach; andØ
    our focus on conducting in vivo and safety screening at early stages of the drug discovery process. Two of our drug candidates are currently in clinical development for Alzheimers disease and one of
our drug candidates is in clinical development for schizophrenia. We also have drug candidates
undergoing preclinical testing for Alzheimers disease and depression. Our drug discovery pipeline
includes compounds that we are optimizing for the treatment of these and other diseases. 1




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We seek to leverage our pipeline of early development candidates through collaborations with
leading pharmaceutical and biotechnology companies. To date, we have secured two separate
collaborations with F. Hoffman  La Roche Ltd. / Hoffman  La Roche, Inc., or Roche, one for the
development of our PDE4 inhibitors, including MEM 1414 and MEM 1917, and the other for the
development of our nicotinic alpha-7 partial agonists, including MEM 3454 and MEM 63908.
As of December 31, 2004, we had received $45.4 million in upfront license fees, payments for
research and development services, milestone payments and an equity investment under these
collaborations. MARKET OVERVIEW According to the World Health Organization (WHO), over 180 million people worldwide suffer from CNS
disorders that exhibit significant impairment of memory and other cognitive functions. These
disorders include neurological diseases associated with aging, such as Alzheimers disease,
vascular dementia and MCI, and certain psychiatric diseases including schizophrenia and depression.
The cognitive deficits associated with these disorders result in symptoms ranging from mild
impairment of short-term and long-term memory to the inability to engage in cogent conversation and
perform routine tasks. We expect the market for drugs treating these diseases to grow significantly
over the next several decades as the baby boomer generation ages, life expectancies increase and
improved drugs and diagnostic techniques are developed to address these diseases. Alzheimers disease is a degenerative neurological disorder that progressively impairs a persons
cognitive function and gradually destroys the brain. It is the number one cause of dementia, and
there is no known cure for Alzheimers disease. The period of time from onset until patient death
averages eight years and can be as long as 20 years. The Alzheimers Association reports that
approximately 4.5 million people in the US suffer from Alzheimers disease, which represents
approximately 10% of the US population over the age of 65 and nearly half of those over the age of
85. According to the Alzheimers Association, by 2050, the number of Americans with Alzheimers
disease could range from approximately 11 million to 16 million. National direct and indirect
costs of caring for individuals with Alzheimers disease are at least $100 billion a year,
according to estimates used by the Alzheimers Association and the National Institute on Aging. Schizophrenia is a chronic psychiatric disorder characterized by difficulties differentiating
between real and imaginary experiences, thinking logically and managing emotional responses to
everyday social situations. According to IMS Health Incorporated, 2004 antipsychotics sales were
$14.1 billion worldwide. There are currently no drugs approved for the treatment of the cognitive
dysfunction associated with schizophrenia. Depression is a psychiatric condition that is characterized by excessive sadness, lack of energy
and loss of interest in day-to-day activities. In addition, cognitive deficits, such as difficulty
concentrating, remembering and making decisions, are common complaints of those suffering from the
disease and are now recognized as elements of depression. Depression can last for many years and
can require long periods of treatment. According to IMS Health, 2004 antidepressant sales were
$20.3 billion worldwide. There are currently no drugs approved for the treatment of the cognitive
dysfunction associated with depression. Vascular dementia is the second leading cause of dementia and often displays symptoms similar to
those of Alzheimers disease. It is caused by one or more strokes, the slow clogging of the
arteries in the brain, traumatic brain injury or other disruptions of blood flow to the brain.
There are currently no drugs approved for the treatment of vascular dementia. MCI is a neurological disorder characterized by greater memory impairment than normally expected
with aging but without impaired judgment or reasoning or other symptoms of dementia. Clinical
researchers have reported that an estimated 80% of MCI patients progress to Alzheimers disease
within six years of diagnosis. In 2001, the FDA acknowledged MCI as a distinct clinical indication,
which allows for the conduct of trials of compounds for the MCI patient population. There are
currently no drugs approved for the treatment of MCI. 2




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SCIENTIFIC BACKGROUND Central nervous system and memory The CNS is comprised of a network of nerve cells, known as neurons, that enable sensation, memory,
emotion and other cognitive functions. Neurons are highly specialized cells that are capable of
communicating with each other through biochemical transmission across junctions called synapses.
For this transmission to occur, neurons secrete chemicals, known as neurotransmitters, that bind to
receptors on a neighboring neuron. Serotonin, dopamine and acetylcholine (ACh) are examples of
neurotransmitters. Neurotransmitter signaling can lead to the activation of a specific class of
molecules known as second messengers, which can both relay electrical signals and amplify their
strength. Cyclic adenosine monophosphate, or cAMP, cyclic guanosine monophosphate, or cGMP and
calcium are examples of second messengers. Second messengers are known to play a key role in many
intracellular processes of direct relevance to the formation and stabilization of memories. Coordinated communication across synapses is essential for the formation of both short-term
memories, which last for minutes or hours, and long-term memories, which last for days and years.
The formation of short-term memories appears to result from the transient release of
neurotransmitters across existing synaptic connections. The formation of long-term memories,
however, not only requires synaptic neurotransmission, but also a subsequent cascade of cellular
events that culminates in protein synthesis, activation of existing synaptic connections and the
formation of new synaptic connections. This cascade of events takes place along pathways within the
neuron. Through
pioneering research conducted over more than 30 years, Nobel
Laureate Dr. Eric Kandel, a founder of the Company,
identified critical cellular pathways involved in the formation of both short-term and long-term
memories. In addition, Dr. Kandel identified specific targets that are believed to be critical to
the process of long-term memory formation and certain classes of compounds that can have
restorative effects on the impairment of long-term memory. These findings were published in the
1990s and served as the cornerstone of our scientific foundation. Memory and cognitive disorders It is well recognized that memory loss and other cognitive impairments are key characteristics of
Alzheimers disease and other dementias. It is less widely recognized, however, that memory loss
and other cognitive impairments frequently occur in psychiatric disorders such as schizophrenia and
depression. For example, many people who have Alzheimers disease tend to suffer from depression
and, conversely, depressed patients tend to experience significant cognitive decline. Symptoms such
as difficulty concentrating, remembering and making decisions are recognized as elements of
depression and Alzheimers disease. Likewise, common manifestations of schizophrenia and
Alzheimers disease include the inability to correctly process new information, retrieve
information and react appropriately to environmental stimuli. The hallucinations and delusions of
schizophrenic people can be traced to misprocessed information or the inability to filter out and
decipher common background noises. In recognition of the possible involvement of cognitive
dysfunction in schizophrenia, the National Institute of Mental Health, or NIMH, has established an
initiative to address the impairments in cognition that appear to be present in many schizophrenic
patients. This initiative is based in part on clinical evidence that remediation of these
cognitive symptoms is a major determinant and predictor of the success of long-term treatment of
schizophrenic patients. UNMET THERAPEUTIC NEEDS Therapies for the treatment of Alzheimers disease, schizophrenia and depression have been
available for a number of years. However, many of the approved drugs for these diseases are not
effective in a large number of patients, can produce significant side effects and, in the case of
Alzheimers disease, lose their effectiveness over time. For example, only about 50% of people
taking acetylcholinesterase inhibitors, the most commonly prescribed drug class for Alzheimers
disease, show even modest improvements in the major symptoms of the disease. Moreover, the benefits
derived from taking these drugs typically last for only six to nine months. Of patients taking
selective serotonin reuptake inhibitors, or SSRIs, the largest category of antidepressants, 30% to
45% have no clinical response. In addition, current therapies for the treatment of schizophrenia
and depression do not address the cognitive impairments associated with these disorders. In
addition to efficacy limitations, the majority of patients taking currently approved drugs for the
treatment of Alzheimers disease, schizophrenia and depression experience one or more side effects.
These can include, depending on the drug, headaches, nausea, nervousness, insomnia, agitation,
weight gain and sexual dysfunction. Side effects occur because the biological mechanisms targeted
by these drugs are not only involved in the neuronal pathways implicated in the disease but are
also involved in multiple other bodily functions. These side effects can be so severe at higher
dosage levels that in order to make the drug tolerable, the actual doses administered must be
moderated. This, in turn, reduces the effectiveness of the treatment. 3




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We believe that therapies designed to address biological targets within the cellular pathways
critically involved in memory formation and other cognitive functions could be effective in
treating many major neurological and psychiatric disorders. We also believe that due to the
relative specificity of these targets, there are opportunities to reduce side effects. THE MEMORY PHARMACEUTICALS DRUG DEVELOPMENT APPROACH We are focused on the discovery and development of CNS drugs that impact biological targets
believed to play a critical role in memory formation and cognition. Based on our understanding of
neuronal pathways, we are targeting specific subcategories of neurotransmitter receptors, specific
enzymes that regulate second messengers and protein channels that modulate the flow of second
messengers such as calcium. We screen, optimize and develop highly selective compounds for these
targets. Through this approach, we believe we can address many of the debilitating symptoms of
several neurological and psychiatric disorders and potentially slow or halt the progression of some
of these diseases. Compared with current alternatives for the treatment of Alzheimers disease,
schizophrenia and depression, we believe that drug candidates we develop may provide enhanced
efficacy and may have an improved side effect profile. Our interdisciplinary drug discovery and development approach enables us to generate drug
development programs focused on multiple targets and clinical indications. Through this approach,
we believe that we are able to identify and optimize promising drug candidates quickly and
efficiently. To accomplish this:  Ø
    We use our extensive knowledge of the neuronal pathways involved
in memory formation to identify highly relevant targets in the
cascade of events leading to long-term memory formation.Ø
    We have created a dynamic, interdisciplinary environment in which
experts in neuroscience, molecular biology, medicinal chemistry
and preclinical drug development work closely together to screen,
identify and optimize drug candidates.Ø
    We conduct iterative tests on our compounds to determine their
pharmacokinetics, including their ability to be absorbed,
distributed and metabolized in the body and their toxicity levels.
In addition, we measure their biochemical and physiological
effects in the body and their mechanisms of action, such as their
ability to penetrate the blood-brain barrier.Ø
    Beginning at the earliest stages of drug discovery and continuing
throughout the drug development process, we screen our compounds
to eliminate those that are not specific to an identified target
and therefore either exhibit increased side effects or cannot be
optimized for a particular disease. In this process we use many
neurobehavioral animal models and other sophisticated screening
tools. We believe that we apply these screening techniques earlier
in the development process than most other biopharmaceutical
companies.Ø
    We complement our scientific disciplines with leadership by
individuals who have extensive expertise and experience in drug
discovery and development, related technologies and collaboration
management. We design our drug discovery process with the goal of significantly enhancing our ability to
develop high quality drug candidates on an accelerated basis and to reduce our risk of failure in
the clinical trial process. We believe that this approach helped us to secure our two
collaborations with Roche, each of which was entered into following preclinical tests of our
compounds. As of December 31, 2004, we had received $45.4 million in upfront license fees, payments
for research and development services, milestone payments and an equity investment under these
collaborations. In addition to royalties on any product sales, we could receive up to $248.0
million from these collaborations (based on achievement of all of the milestones for products for
each of the indications specified in the collaboration agreements and including upfront license
fees). THE MEMORY PHARMACEUTICALS STRATEGY Our goal is to be a leading biopharmaceutical company focused on the discovery and development
of drug candidates for the treatment of CNS disorders that exhibit significant impairment of memory
and other cognitive functions. In order to achieve this goal, we:  Ø
    Aggressively pursue the discovery and development of drug
candidates in large disease markets in which there are significant
unmet medical needs. We are initially focused on the discovery
and development of drug candidates for major CNS diseases for
which the market opportunities are extensive and current therapies
generally provide limited effectiveness and undesirable side
effects. These diseases include Alzheimers disease, schizophrenia
and depression. We intend to apply our expertise in the future to
encompass a wider spectrum of neurological and psychiatric
disorders by expanding the application of existing compounds and
optimizing new compounds for these and other disorders such as
vascular dementia, MCI and Parkinsons disease, age associated
cognitive decline, memory impairment from coronary artery bypass
grafting, attention deficit hyperactivity disorder,
chemotherapy-induced cognitive impairment, obsessive compulsive
disorder and alcohol-induced
cognitive impairment. 4




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Ø
    Leverage our extensive understanding of neuronal pathways and our
interdisciplinary, accelerated drug development approach to yield
multiple promising drug candidates.We use our knowledge of the
critical pathways involved in memory formation to identify
multiple targets that we believe are highly relevant to many
different CNS disorders. We optimize compounds to act on targets
that affect cellular pathways that are involved in more than one
CNS disorder and we seek to develop multiple compounds to act on
multiple targets in the same disorder. For example, for the
treatment of Alzheimers disease, we are engaged in preclinical or
clinical testing for two compounds that regulate cAMP, one
compound that regulates neuronal calcium and one compound that
acts as a partial agonist of the nicotinic alpha-7 receptor. In
addition, one of these compounds regulating cAMP is also being
evaluated as a potential candidate for the treatment of
depression. Compounds in our PDE10A inhibitor program target the
regulation of cAMP and cGMP and may be useful in the treatment of
schizophrenia, Parkinsons disease and obsessive compulsive
disorder.Ø
    Establish collaborations with leading pharmaceutical and
biotechnology companies to advance our drug candidates through
clinical development and commercialization.We seek to leverage
our pipeline of early-stage development candidates through
collaborations with leading pharmaceutical and biotechnology
companies. We believe that our focus on drug candidates with large
market opportunities helps us secure these types of
collaborations. We also believe that our rigorous approach to
preclinical testing enables us to partner our compounds relatively
early in the development process and on terms more in line with
those achieved at later stages of clinical development. We seek to
retain options to commercialize our compounds in certain
territories or applications. We have a collaboration with Roche
for our PDE4 inhibitors and a second collaboration with Roche for
our nicotinic alpha-7 partial agonists. We are exploring the
potential for a collaboration for MEM 1003 and for our PDE10A
inhibitor program.Ø
    Seek to selectively in-license or acquire additional compounds.
We seek to selectively augment our internal drug discovery program
through the in-licensing or acquisition of advanced stage
preclinical and clinical development stage compounds that are
relevant to the pathways involved in memory formation and
cognition. We believe that our expertise in these pathways enables
us to identify promising compounds that can be converted to
promising CNS drug candidates. OUR DRUG DEVELOPMENT PROGRAMS Our drug development pipeline currently includes four programs in clinical and preclinical
stages (MEM 1003, PDE4 inhibitors, Nicotinic alpha-7 partial agonists and PDE10A inhibitors), and
several other compounds with potential in our early stage pipeline. All of our drug candidates are
small molecules designed for oral dosing. Our compounds that we have designated as drug candidates
are as follows: Drug candidate
    
    Mechanism
    
    Target indication
    
    Stage of development
    
    Other
potential indicationsMEM 1003
    
    Neuronal
    
    Alzheimers disease
    
    Phase I completed1
    VascularL-type calcium
    
    
    
    
    dementia andchannel modulator
    
    
    
    
    MCIMEM 1414
    
    PDE4 inhibitor
    
    Alzheimers disease
    
    Phase I
    MCIMEM 3454
    
    Nicotinic alpha-7
    
    Schizophrenia
    
    Phase I
    
    Alzheimers diseasepartial agonistMEM 1917
    
    PDE4 inhibitor
    
    Alzheimers disease
    
    Preclinical
    DepressionNicotinic alpha-7MEM 63908
    
    partial agonist
    
    Alzheimers disease
    
    Preclinical
    
    Schizophrenia
   1
    
    In preparation for the Phase IIa study of MEM 1003, we are currently conducting a
safety and tolerability study in patients with Alzheimers
disease in the US. 5




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MEM 1003 for the treatment of Alzheimers disease, vascular dementia and MCI Overview of Alzheimers disease Alzheimers disease is a progressive neurodegenerative disorder for which there is no known cure.
Later stages of Alzheimers disease involve severe loss of memory and other cognitive functions,
including loss of awareness of recent experiences and of surroundings, and the inability to perform
basic tasks. Patients with Alzheimers disease also suffer from significant personality and
behavioral changes such as paranoia, delusions, hallucinations and compulsive, repetitive
behaviors. The exact cause of Alzheimers disease is currently unknown. All Alzheimers patients, however,
exhibit a variety of characteristic pathological abnormalities. One characteristic of Alzheimers
disease pathology is the presence of amyloid plaques and neurofibrillary tangles. The plaques are
clumps of proteins that form deposits around neurons, while the tangles are clumps of proteins that
accumulate inside neurons. Plaques and tangles are thought to interfere with normal
neurotransmitter function and to have a toxic effect on neurons.
Preclinical data from several laboratories suggests that the amyloid
protein from which plaques are formed disrupts the function of the
nicotinic alpha-7 receptor, which modulates neurotransmitter
activity known to be required for the formation of long-term
memories and possibly other cognitive functions as well. Other pathological abnormalities present in Alzheimers patients involve dysfunction of
neurotransmitters. Alzheimers patients exhibit a deficiency of the neurotransmitter acetylcholine,
or ACh. This neurotransmitter is involved in short-term memory, alertness, and attention, and
consequently reduced ACh levels are thought to be associated with cognitive impairment. In
addition, post-mortem studies of Alzheimers patients have identified changes in the
neurotransmitter glutamate, suggesting that over-stimulation of glutamate is in part responsible
for neuronal degeneration. Alzheimers patients also exhibit characteristic neuronal imbalances in the second messengers
calcium and cAMP. Clinical research indicates that cAMP plays a role in memory, suggesting that
drugs directed at this target will have beneficial effects on the treatment of memory loss
associated with Alzheimers disease. One of the earliest manifestations of Alzheimers disease is
an impaired regulation of calcium within CNS neurons. While small amounts of calcium are essential
for memory formation and other cognitive functions, too much calcium causes a wide variety of toxic
symptoms. Neuronal calcium levels are regulated by specific proteins known as L-type calcium
channels. Abnormal regulation of these channels is believed to be an early step in the Alzheimers
disease process, first impairing the pathways required for memory and other cognitive functions and
eventually causing the death of the neurons. Continuing studies of Alzheimers disease suggest that it is a highly complex disease that
implicates numerous neurobiological pathways, presenting multiple opportunities for therapeutic
intervention. Current therapies for the treatment of Alzheimers disease The principal treatments currently approved for Alzheimers disease belong to a class of drugs
called acetylcholinesterase inhibitors. Due to the relationship between ACh and Alzheimers
disease, it was originally thought that addressing the ACh deficit would have a significant
therapeutic impact on Alzheimers disease. Acetylcholinesterase inhibitors are designed to impede
the breakdown of ACh by an enzyme called acetylcholinesterase and work to keep levels of ACh high,
although the cells that produce ACh continue to become damaged or die. Despite the relationship
between ACh and Alzheimers disease, acetylcholinesterase inhibitors are not particularly effective
in either treating the symptoms or stopping the progression of the disease. Only about 50% of
patients taking acetylcholinesterase inhibitors for the treatment of Alzheimers disease experience
even a modest improvement in symptoms. For those who show improvements, these benefits typically
last for only six to nine months. Acetylcholinesterase inhibitors produce a variety of side effects, including nausea, vomiting, loss
of appetite, diarrhea and muscle cramps. These side effects significantly limit the drug dosage
that can be safely administered, thereby restricting the ability to dose at levels that might
further slow the deterioration of neurons and impact the progression of the disease. A second category of drugs, NMDA-receptor antagonists, is designed to mitigate the impact of
excessive glutamate release by blocking N-methyl-D-aspartate, or NMDA, receptors. One drug in this
class has recently been approved in the US for treatment of moderate to severe cases of Alzheimers
disease. There have also been numerous attempts to develop drugs for Alzheimers disease that directly
target the characteristic plaques and tangles. While many of these drug development programs have
been abandoned, there are still programs that continue to focus on this method of action, though no
drug candidates from these programs have been approved in the US. MEM 1003 MEM 1003 is a neuronal L-type calcium channel modulator that we are developing for the treatment of
Alzheimers disease. By blocking L-type calcium channels, MEM 1003 may regulate the flow of
calcium. We believe that this approach may enhance 6




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cognition by re-establishing normal levels of calcium, which is essential for normal functioning of
the neuronal pathways. Further, we believe that this modulation of the calcium flow may impact the
progression of the disease by protecting these neurons from further damage caused by the amyloid
plaques. We have conducted preclinical tests of MEM 1003 in vitroas well as in animal models. In our in
vitrotests, MEM 1003 significantly blocked and regulated the function of neuronal L-type calcium
channels in brain slices and single cell cultures. We have conducted animal tests of MEM 1003 to assess its effect on learning and memory and its
toxicology profile. We used various behavior assays to test the effect of MEM 1003 on memory and
learning in four different species of varying ages, including aged non-human primates. In each of
these tests, MEM 1003 improved memory and learning in healthy and cognitively impaired animals. MEM
1003 achieved these results using oral administration across a wide dose range. We have also tested
the toxicology of MEM 1003 in two species over 13 weeks. There were no significant adverse
toxicological findings in these studies, except as expected, at high dose levels. In July 2003, we completed dose-escalating, double-blind, placebo-controlled Phase Ia and Ib trials
with 125 healthy volunteers in the United Kingdom to evaluate the potential cardiovascular impact
and side effect profile produced by single and multiple doses of MEM 1003. Over a dose range of up
to 180 milligrams, which was the maximum dose tested, MEM 1003 was generally well tolerated. For
doses of MEM 1003 up to the maximum tested, neither young nor elderly (over age 55) volunteers
experienced any significant cardiovascular or other significant adverse side effects. In our human
trials, the concentration of MEM 1003 in blood plasma exceeded the concentration levels which we
achieved in our animal efficacy models. This leads us to believe that MEM 1003 may achieve the
same therapeutic benefits in humans as it achieved in our animal models. In addition to testing safety, we assessed cognitive enhancement in 40 of the volunteers from
our Phase Ib trials. Both young and elderly healthy volunteers were tested with a widely used set
of cognitive tests. In these tests, there were statistically significant effects on several of the
cognitive measures of longer-term aspects of memory. We are currently designing a Phase IIa randomized, multi-center, double-blind, placebo-controlled
clinical study with this drug candidate, which we expect to commence by the end of the first half
of 2005. In January 2005, we commenced a safety and tolerability study in patients with
Alzheimers disease under a US Investigational New Drug (IND) application to assist us in assessing
the differences in the safety and tolerability profile of MEM 1003 in healthy volunteers and
Alzheimers patients in order to design the Phase IIa study. The safety and tolerability study is
a single-center, randomized, double-blind, placebo-controlled clinical study. The study design
consists of two segments, a double-blind dose escalation segment (the first segment) and
double-blind treatment segment (the second segment). Approximately 85 patients are expected to be
tested over the course of the two segments of the study. In the first
segment, a certain dose level of MEM 1003 or placebo will be administered to patients twice on one day of certain weeks
during the study period. Patients in this first segment will be treated at escalating doses of MEM
1003, which may reach up to 120 milligrams per dose. The highest tolerated dose of MEM 1003 in the
first segment will then be administered to patients participating in the second segment of the
study. In the second segment, successive groups of patients will be administered MEM 1003 or
placebo twice daily for a period of ten days. In addition to measuring safety and tolerability, a
secondary objective of the study is to evaluate the acute neurocognitive function in Alzheimers
patients using a battery of standard cognitive tests. Pharmacokinetic measurements, or how
the body absorbs, distributes, metabolises and eliminates MEM 1003, and other observations from the
safety and tolerability study, including the results of the cognitive tests, will be used to select
the appropriate dose(s) and finalize design of the Phase IIa clinical study. The overall timing of the safety and tolerability study has been extended as a result of slower
than expected patient enrollment and our decision to increase the number of patients being studied.
While we currently expect to commence our Phase IIa study by the end of the first half of 2005,
our ability to do so will depend upon our achieving patient enrollment sufficient not only to
complete the safety and tolerability study but also to commence the Phase IIa study in the time
frame that we have planned. We are funding the safety and tolerability study and intend to fund the Phase IIa clinical trials
for MEM 1003 ourselves. However, we are also exploring the potential for a collaboration for MEM
1003. Similar to Alzheimers disease, patients with vascular dementia and MCI are also believed to
exhibit an inability to regulate the level of calcium in the CNS. Due to this common defect, we
believe that MEM 1003 has the potential to be effective in vascular dementia and MCI. We are
currently focusing on clinical trials for MEM 1003 in Alzheimers disease, and depending on the
outcome of this program, we may pursue MEM 1003 for other indications, including vascular dementia
and MCI in the future. 7




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MEM 1414 for the treatment of Alzheimers disease and potentially MCI MEM 1414 is a PDE4 inhibitor and our second drug candidate for the treatment of Alzheimers disease
and potentially for MCI. PDE4 inhibitors are designed to inhibit the activity of PDE4, the enzyme
which breaks down neuronal cAMP. Studies have shown that administering PDE4 inhibitors can have a
restorative effect on memory loss in animal models, including those of Alzheimers disease. Based
on these findings, in addition to our own research on the neuronal pathways involved in Alzheimers
disease, we believe that we may be able to treat this disease by increasing the levels of neuronal
cAMP. In preclinical tests of cognition in several species, MEM 1414 reversed memory deficits and
demonstrated significant and sustained improvements in cognitive function over a wide dose range.
Furthermore, after a single dose applied to a rat model, positive effects on long-term memory were
sustained over a three-month period. Under our 2002 Roche collaboration, Roche has exclusive rights to MEM 1414 and is currently
conducting Phase I clinical trials. In a single ascending dose study in which groups of healthy
volunteers were given a single dose of MEM 1414 at a particular dose level for each group, MEM 1414
was generally well tolerated across a wide dose range. A multiple ascending dose Phase I clinical
trial, in which each participating group of healthy volunteers is receiving multiple doses at a
particular dose level for each group, is currently underway. Although the single doses of MEM 1414 administered in the Phase I single ascending dose study were
generally well tolerated even at the highest doses administered, in subsequent preclinical animal
tests conducted by Roche, MEM 1414 has caused adverse side effects, which in one study resulted in
deaths at high doses in one of two animal species tested. As a result, Roche initiated additional
investigational animal toxicology and other assessments of MEM 1414, and reduced, or capped, the
maximum dosage to be administered in the multiple ascending dose Phase I clinical trial from the
originally established dose range. The maximum dose in the multiple ascending dose Phase I
clinical trial was subsequently raised beyond the initial cap, though analysis of the additional
animal toxicology and other assessments of MEM 1414 are ongoing. The results of the current
clinical trials and the animal studies could impact the continuation of the MEM 1414 program under
the Roche collaboration, as well as potentially affect Roches development plans for MEM 1917,
the back-up candidate to MEM 1414 for the treatment of Alzheimers disease. Subsequent animal studies and clinical trials may fail to support our earlier preclinical and
clinical trial results, particularly given that PDE4 inhibitors have generally exhibited safety and
tolerability problems that have limited the ability of these compounds to be used as effective
drugs. MEM 1414 may also have applicability for other indications, including MCI. MEM 3454 for the treatment of schizophrenia Overview of schizophrenia Schizophrenia is a neurological brain disorder that interferes with a persons ability to think
clearly, manage emotions, make decisions, and relate to others. Specific symptoms include delusions
and hallucinations, an inability to sort and interpret incoming sensations and a corresponding
inability to respond appropriately, and an altered sense of self. No single defect appears to be
responsible for schizophrenia. Rather, multiple genetic and environmental factors seem to
contribute to disturbances in brain function. Current therapies for the treatment of schizophrenia Current drug treatments for schizophrenia modulate primarily the level of the neurotransmitter
dopamine by blocking the actions of this substance at the receptor level. This approach is based on
the belief that decreasing the activity of the receptor negates the impact of the increase in the
neurotransmitter. Other drug therapies target multiple neurotransmitter systems and receptors.
Approximately 30% of individuals with schizophrenia do not respond to current medications at all
and, even for those who benefit, these drugs often do not address the social withdrawal, affective
changes and emotional behavior associated with the disease. Moreover, existing drugs are not
designed to address or resolve the cognitive impairments associated with this disease. Current drug
therapies for schizophrenia produce a variety of side effects. In particular, some of these
antipsychotic drugs may result in weight gain, which can lead to an increase in the incidence of
Type II diabetes and stroke. MEM 3454 MEM 3454 is a partial agonist of the nicotinic alpha-7 receptor that we are developing as a
potential therapy for schizophrenia. Studies have shown that schizophrenic patients can experience
relief of symptoms through the administration of nicotine, which binds to nicotinic receptors. We
believe that these nicotinic receptors play a significant role in long-term memory formation and
other 8




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cognitive functions. Nicotine, however, is associated with significant side effects, including
cardiovascular disease, and cannot effectively be used as a therapeutic agent. One of the nicotinic receptors is the nicotinic alpha-7 receptor. The nicotinic alpha-7
receptor is a highly specialized receptor found in the CNS, particularly in the hippocampal region
of the brain. This receptor modulates neurotransmitter activity known to be required for the
formation of long-term memories, and we believe that it plays an important role in other cognitive
functions as well. The nicotinic alpha-7 receptor has been linked genetically with schizophrenia.
We believe that compounds acting on the nicotinic receptor could be beneficial in the treatment of
schizophrenia. An agonist is a molecule that binds to a receptor and mimics the action of the transmitter
specific for that receptor. Full agonists tend to lose their ability to induce activity after
repeated administration. Partial agonists, on the other hand, do not typically result in the same
desensitization. We have combined our knowledge of receptor action in the brain with our
understanding of nicotinic alpha-7 receptors to develop partial agonists for this receptor. MEM
3454 is the lead compound from our nicotinic alpha-7 partial agonists series. MEM 3454 has demonstrated efficacy in several preclinical animal models of schizophrenia. MEM
3454 generated positive results in preclinical models of antipsychotic drug action, including the
animals ability to process information in a coordinated fashion. MEM 3454 also demonstrated
activity in multiple animal models of cognition. In addition, in a preclinical test administering
MEM 3454 for seven days, there was no evidence of weight gain in the animal models. In February 2005, we commenced a Phase I clinical trial of MEM 3454 in healthy volunteers
under a Clinical Trial Application that we filed with Health Canada. The study is a single-center,
double-blind, placebo-controlled clinical study to evaluate the safety, tolerability and
pharmacokinetics of single ascending doses of MEM 3454. Under our 2003 Roche collaboration, Roche has the right to obtain an exclusive license for MEM
3454 following the completion of Phase IIa clinical trials by making payments to us upon our
achievement of certain developmental milestones. Alternatively, Roche has the right to terminate
its license option with respect to MEM 3454 or any other product covered by that agreement on a
product-by-product basis at certain times during the development of the product. If at any point
during the development of MEM 3454, Roche chose not to maintain its license option with respect
to this drug candidate, we would not receive further milestone payments or other support from Roche
for its continued development. MEM 1917 for the treatment of Alzheimers disease and depression MEM 1917 is a PDE4 inhibitor which is being evaluated by Roche as a back-up candidate to MEM 1414
for the treatment of Alzheimers disease. As is the case with MEM 1414, MEM 1917 is designed to
inhibit the activity of PDE4, the enzyme that breaks down neuronal cAMP. MEM 1917 is also being evaluated by Roche as a potential candidate for the treatment of depression.
We believe that the pathways involved in memory formation may also be implicated in depression,
although this link is not fully established or understood. If there are shared pathways in memory
formation and depression, increasing levels of cAMP by inhibiting the action of PDE4 may remediate
the neuronal imbalances and the cognitive impairments that occur in depressed patients. Selective serotonin reuptake inhibitors and dual uptake inhibitors are the principal drugs
currently approved for depression. These drugs work by impeding the brains breakdown of serotonin,
a key neurotransmitter that is depleted in depressed patients and, in the case of dual uptake
inhibitors, a second neurotransmitter norepinephrine as well. These existing drugs can produce
several side effects, including headaches, nausea, nervousness, insomnia, agitation and sexual
dysfunction, which significantly limit the dosage that can be safely administered. This, in turn,
can reduce the effectiveness of these drugs. Another major drawback of these therapies is their
relatively slow onset, requiring several weeks of administration before a patient may experience a
therapeutic effect. We believe that PDE4 inhibitors, through their impact on cAMP, may provide the
potential for a safer and faster-acting therapy than current therapies for depression. In multiple animal behavior models of cognitive impairment, MEM 1917 has reversed memory
deficits. In addition, in several animal models of depression, MEM 1917 has demonstrated efficacy
in both short-term and long-term tests of antidepressant activity. Both Roche and we have
conducted toxicology studies and are currently conducting preclinical animal studies for efficacy
in Alzheimers disease, cognition and depression. The results of these studies, together with the
comparative profile of MEM 1917 relative to MEM 1414, will be considered by Roche in determining
the development plans for this compound. Under our 2002 Roche collaboration, Roche has an exclusive license for MEM 1917. 9




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MEM 63908 for the treatment of Alzheimers Disease MEM
63908 is a partial agonist of the nicotinic alpha-7 receptor and the
fourth drug candidate that
we are developing as a potential treatment for Alzheimers disease. Among other pathological abnormalities, Alzheimers patients typically exhibit amyloid plaques,
which are clumps of protein that form deposits around neurons. Preclinical data from several
laboratories suggests that the amyloid protein from which these plaques are formed disrupts the
function of the nicotinic alpha-7 receptor. We believe that as a partial agonist of the nicotinic
alpha-7 receptor, MEM 63908 could overcome the effect of the amyloid protein and thereby be
beneficial in the treatment of Alzheimers disease. We have conducted animal tests of MEM 63908 to assess its effect on learning and memory. We used
various behaviour assays to test the effect of MEM 63908 on memory and learning. In these tests,
MEM 63908 improved learning and memory in healthy and aged cognitively impaired animals. MEM 63908
has also demonstrated a good safety profile in toxicological and
safety studies. Under our 2003 Roche collaboration, Roche has the right to obtain an exclusive license for MEM
63908 following the completion of Phase IIa clinical trials by making payments to us upon our
achievement of certain developmental milestones. Alternatively, Roche has the right to terminate
its license option with respect to MEM 63908 or any other product covered by that agreement on a
product-by-product basis at certain times during the development of the product. If at any point
during the development of MEM 63908, Roche chose not to maintain its license option with respect to
this drug candidate, we would not receive further milestone payments or other support from Roche
for its continued development. PDE10A Inhibitor Program and other drug discovery programs PDE10A is an enzyme that has been shown to be present at high levels in neurons in areas of the
brain that are closely associated with many neurological and psychiatric disorders such as
schizophrenia, Parkinsons disease and obsessive compulsive disorder. PDE10A degrades the
intracellular signaling molecules cAMP and cGMP, molecules that are responsible for improving the
function of many different cells in the body, including neurons. By inhibiting PDE10A, levels of
cAMP and cGMP are increased within neurons and the ability of these neurons to function properly is
thereby improved. We believe that PDE10A inhibitors may be useful in treating a range of
neurological and psychiatric disorders. We have identified two chemical series of compounds that have demonstrated effectiveness in the
selective inhibition of PDE10A activity. Representatives of these PDE10A inhibitors have been
shown to be effective in several animal models of schizophrenia. We are in the process of
identifying potential drug candidates from these series. We are exploring the potential for a collaboration for our PDE10A inhibitor program. In addition to our preclinical and clinical drug candidates, we continue to work on new targets and
new chemistries. We are testing a number of compounds in vitroand in animal models for efficacy,
safety and tolerability. Our pipeline includes additional compounds that we are exploring for the
treatment of Alzheimers disease, schizophrenia, depression, vascular dementia and MCI. In
addition, we are working on compounds that may have potential application to other CNS disorders,
such as Parkinsons disease and age associated cognitive decline. RESEARCH AND DEVELOPMENT Our drug discovery programs are designed to yield effective and safe drug candidates in a shorter
timeframe relative to industry norms. By performing benchmark safety and efficacy tests early in
the process and only advancing the most promising drug candidates, we believe that we are able to
accelerate the overall drug development timeline and provide higher quality drug candidates with
reduced risk of failure in clinical trials. We strive to achieve a high level of productivity in
our drug discovery and development programs in part through the close integration of our research
group and development group staff. Our research efforts focus on identifying new molecular targets that play a role in the
formation, modification and stabilization of synaptic connections in the human brain. We clone
these targets and study their functions by developing and applying various assays. To discover
active compounds, we screen the targets against libraries of compounds that embody properties that
would make them suitable for use as CNS drugs. Compounds are tested and optimized in an iterative
process designed to produce highly specific, orally available drug candidates suitable for CNS
indications. Set forth below is a summary description of the five principal components of our drug
selection process. Target selection We select targets that we believe have an important role within the pathways involved in long-term
memory formation, are well distributed in the relevant areas of the brain, and are within the class
of proteins that are suitable as drug targets. These targets may regulate neurotransmitter
signaling, modulate second messengers that carry the signal from the synapse to the rest of the
neuron, or sensitize the receptors and channels in the synapse. 10




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CNS chemistry Using internal and external chemistry resources, we employ a combination of medicinal,
combinatorial and analytical chemistry procedures to maximize the chances of discovering specific
and efficacious lead compounds. To produce lead optimization candidates, we employ an iterative
process in which medicinal chemists who synthesize novel chemical entities work with our
neurobiologists and pharmacologists to improve the desirable features of the compound, while
reducing the potential for undesired characteristics. We select compounds strategically, and
synthesize focused chemical libraries based on their degree of target specificity, binding
properties and biological functionality. Animal model screening processes We have developed a series of assays that act within progressively more complex and realistic
biological environments in order to systematically evaluate potential drug candidates for their
effect on memory and other cognitive functions. The process begins with cell-based assays performed
in test tubes, which assist us in understanding the biochemical effect of compounds. Next,
proprietary assays are used to measure electrical activity in brain slices of rats and mice. These
sophisticated neurobehavioral assays allow us to determine the neurophysiological effect of
compounds before using more complex and expensive animal models. Finally, we have developed animal
behavior models, using both young and old rats and mice that allow us to assess different aspects
and phases of long-term memory and cognition. We use naturally-aged impaired mice and rats for
these studies, which we believe ensures a more realistic physiology than would be available in
young animals with artificially-induced age characteristics. We believe that the animal models we
have developed and employ enhance our ability to predict promising drug candidates on an
accelerated and more focused and informed basis. Preclinical safety and pharmacokinetics Our safety specialists study the interaction of our potential drug candidates with the intended
target as well as with the rest of the body. They measure the ability of the compound to be
absorbed and to reach the intended target, and they determine how the drug is metabolized within,
and removed from, the body. They also study the potential for side effects. An anatomical and functional feature of the brain that makes it difficult to formulate
CNS-specific therapeutics is the blood-brain barrier. This barrier can prevent drugs from entering
the brain from blood vessels. We have significant expertise and experience in using rat and mouse
models to assess the plasma/brain ratios of compounds in a steady state, which is indicative of a
compounds ability to penetrate the blood-brain barrier. We control these analytical tests by
conducting these analyses in our own laboratories, which are designed to meet FDA Good Laboratory
Practice standards. Bioinformatics and information technology systems We deploy an advanced informatics infrastructure to support our research and development efforts.
Our hardware infrastructure includes a high-speed internal network with data integrity and security
measures. Our software infrastructure is tailored to address specific needs, including research
logistics, scientific data management and analysis. Productivity-enhancing systems have been put in
place to handle many routine aspects of conducting pharmaceutical research. An enterprise-wide
scientific data management system captures critical information on chemical structures and
associated biological data to create a shared knowledge-base designed to accelerate the drug
development process. We employ scientists cross-trained in information technology to assess and
implement commercially available scientific computing tools or to develop new tools internally. COLLABORATIONS AND IN-LICENSES We seek to enter into collaborations with leading pharmaceutical and biotechnology
companies and we believe that this enables us to leverage these companies resources to exploit our
drug candidates on a global basis, while allowing us to remain focused on early stage development
and discovery of drug candidates. To date, we have established two major collaborations, both of
which are with Roche. One of the collaborations is for the development of our PDE4
inhibitors, including MEM 1414 and MEM 1917, and the other collaboration is for the development of our nicotinic alpha-7 partial agonists, including MEM 3454 and MEM 63908. Another important component of our strategy is to augment our internal drug discovery programs
through the selective in-licensing of advanced-stage preclinical and early-stage clinical chemical compounds
that we believe are relevant to the pathways involved in memory formation and other cognitive
functions. 11




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2002 Roche collaboration In July 2002, we entered into a collaboration with Roche for the development of PDE4 inhibitors for
neurological and psychiatric indications, and potentially other indications, which we extended and
expanded in August 2004. We granted Roche a worldwide, exclusive, sub-licensable 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. If Roche decides to co-promote
any product covered by the agreement in the US, Roche must offer us this co-promotion opportunity
before it may offer a right to co-promote such product to any non-affiliated third party. Roche is
obligated to provide, at its own expense, clinical supplies of compounds covered by this agreement. Under the 2002 Roche collaboration, Roche has paid us a total of $21.6 million through December 31,
2004, comprised of an upfront license fee, payments for research and development services and one
milestone payment. Roche is obligated to make milestone payments to us if we achieve specified
development, regulatory and commercialization milestones (including sales level milestones
following a products launch) for certain indications. These indications include neurological,
psychiatric and non-CNS indications for our PDE4 inhibitors, as well as any neurological or
psychiatric indication for any PDE4 inhibitor developed by Roche without using our technology. If
we reach all of the milestones for one neurological indication and one psychiatric indication for
our PDE4 inhibitors under the agreement, milestone payments payable to us under the agreement,
including the upfront license fee and bonus payments for achieving certain sales milestones, could
total $106.0 million. In addition, we are entitled to receive up to $34.5 million in milestone
payments if we develop compounds for both a second neurological indication and an indication other
than a neurological or psychiatric indication. We are also entitled to royalties based on a
specified percentage of net sales of products, which increases at increasing net sales levels,
during the term of the agreement. Royalty payments will expire generally on a country-by-country
basis on the later to occur of (i) the expiration of the last to expire patent containing a
composition of matter claim in a given country and (ii) ten years following the launch of the
product in that country. The agreement may be terminated by either party following an uncured material breach by the other
party. In addition, we have the right to terminate the agreement on a product-by-product or
region-by-region basis, or in its entirety in certain cases, if Roche does not use reasonable
diligence to develop, obtain regulatory approvals for, manufacture or commercialize products in
certain key countries. On August 6, 2004, the research collaboration under this agreement with
Roche was extended and expanded for a two-year period. In connection with this extension, Roche has
committed to a minimum of 18 months additional funding of our research collaboration efforts in
the aggregate amount of $5.25 million, payable quarterly commencing September 9, 2004. At any time
after September 9, 2005, Roche has the right to terminate the research collaboration or the
agreement on a region-by-region or product-by-product basis or in its entirety, upon the giving of
six months advance notice, or, in the case of the agreement, without notice in the event that we do
not consent to a proposed sublicense by Roche to a third party. Unless the research collaboration
is earlier terminated by Roche, our research collaboration efforts under this agreement will be
funded by Roche through September 9, 2006. Unless it is earlier terminated, the agreement will
terminate on the date of expiration of all royalty and other payment obligations under the
agreement. Upon the termination of the agreement as to any country, region or product, the rights and licenses
granted to Roche under the agreement as to such country, region or product will terminate, except
that Roche can use collaboration technology other than for PDE4 inhibitors. In addition, at our
request, Roche is required to transfer certain filings, rights, approvals, agreements and data
relating to such product to us at no expense. Further, upon any such termination, we would have a
non-royalty bearing license under related Roche intellectual property rights to commercialize such
product or in such country or region. MEM 1414, which was accepted for the Roche development pipeline in March 2003, is included in this
collaboration and in the license rights that we granted to Roche. In August 2003, MEM 1414 entered
Phase I clinical testing, with initial development focusing on the treatment of Alzheimers
disease. MEM 1917, a backup candidate to MEM 1414 for the treatment of Alzheimers disease and a
potential candidate for the treatment of depression, is also licensed to Roche under this
collaboration. 2003 Roche collaboration In August 2003, we entered into a second collaboration with Roche to develop nicotinic alpha-7
partial agonists for treating CNS indications including schizophrenia and Alzheimers disease. We
granted to Roche the right, on a compound-by-compound basis, to obtain an exclusive, worldwide,
sub-licensable license to our patent rights and know-how for any nicotinic alpha-7 partial agonist
that we develop, during the five years following the commencement of the collaboration, for the
prevention or treatment of any diseases in any indication, for either human or veterinary use. This
right is exercisable by Roche upon completion of Phase IIa clinical trials for a covered compound,
or earlier under certain circumstances, and allows us to continue to manage at our expense the
development of our compounds covered by the collaboration through the completion of Phase IIa
clinical studies. We have the right to co-promote any product covered by the agreement in the US,
on a product-by-product basis, subject to the terms of a separate co-promotion agreement, if we pay
specified percentages of Roches Phase III global development costs for that product. If we
exercise our co-promotion right with respect to a particular product, we will be entitled to a
specified percentage of the gross profits from US sales of 12




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that product, in exchange for a reduction in the royalties on US sales otherwise payable to us by
Roche. Upon exercise by Roche of its right to license a compound, Roche is obligated to provide, at
its own expense, clinical supplies of such compound. Under the 2003 Roche collaboration, Roche has paid us a total of $23.8 million through
December 31, 2004, comprised of an upfront license fee, payments for research and development
services and an equity investment. Under the 2003 Roche collaboration, Roche paid us an upfront
license fee of $10.0 million in September 2003 and is obligated to pay us $6.0 million for research
and development services over the first two years of the agreement. If Roche maintains its right to
the license and exercises the right, Roche is obligated to make milestone payments to us if we
achieve specified development, regulatory and commercialization milestones (including sales level
milestones following a products launch) for certain indications. These indications include
neurological, psychiatric and non-CNS indications for compounds developed by us or as part of the
collaboration. If we reach all of the milestones for one neurological indication and one
psychiatric indication for compounds developed under the agreement, milestone payments payable to
us under the agreement, including the upfront license fee and bonus payments for achieving certain
sales milestones, could total $142.0 million. In addition, if we develop compounds for additional
indications, we are entitled to receive milestone payments (i) up to $42 million for each compound
for each additional neurological or psychiatric indication, depending on the indication and the
timing of milestone achievement, and (ii) up to $13 million for each compound for any indication
other than a neurological or psychiatric indication. We are also entitled to royalties based on a
specified percentage of net product sales, which increases at increasing net sales levels, during
the term of the agreement. Roches royalty payment obligations will expire generally on a
country-by-country basis on the later to occur of (i) the expiration of the last to expire patent
containing a composition of matter claim in a given country; and (ii) ten years following the
launch of the product in that country. In connection with the collaboration, Roche purchased shares
of our series Roche preferred stock for an aggregate of $10.0 million (which converted into 925,926
shares of common stock on the closing date of our initial public offering), and received warrants
to purchase 115,740 shares of common stock at an exercise price of $12.96 per share. The collaboration agreement may be terminated by either party following an uncured material
breach by the other party. In addition, Roche has the option to maintain its license rights with
respect to any product covered by the agreement on a product-by-product basis. If Roche chooses
not to exercise its option to maintain its license rights with respect to a product, we would not
receive further milestone payments or other support from Roche for the development of that product.
Roche has the right to terminate the agreement on a product-by-product or region-by-region basis,
or in its entirety in certain cases, if we do not use reasonable diligence in developing nicotinic
alpha-7 partial agonists through Phase IIa clinical trials. We have the right to terminate the
agreement on a product-by-product or region-by-region basis, or in its entirety in certain cases,
if Roche does not use reasonable diligence in meeting its obligations to develop, obtain regulatory
approvals for, manufacture and commercialize products in certain key countries. In addition, Roche
has the right to terminate the agreement at any time, on a region-by-region or product-by-product
basis or in its entirety, upon the giving of advance notice, or without notice in the event that we
do not consent to a proposed sublicense by Roche to a third party in the US. Unless otherwise
terminated, the agreement will terminate on the date of expiration of all royalty and other payment
obligations under the agreement. Upon termination of the agreement as to any country, region or product, the rights and
licenses granted to Roche under the agreement as to such country, region or product will terminate.
In addition, at our request, Roche is required to transfer certain filings, rights, approvals,
agreements and data relating to such product to us at no expense. Further, upon any such
termination, we have the right to obtain exclusive and royalty-bearing license rights under related
Roche patent rights and know-how to commercialize such product in such country or region. MEM 3454 and MEM 63908 are included in this collaboration and in the related license option
rights that we have granted to Roche. MEM 3454 is in preclinical development for the treatment of
schizophrenia and other indications and MEM 63908 is in preclinical development for the treatment
of Alzheimers disease. BAYER AG in-license In June 2001, we entered into an agreement with Bayer AG, or Bayer, for an exclusive, worldwide,
sub-licensable license under certain Bayer patents and know-how to MEM1003 for the treatment of
human peripheral and CNS-related disorders. We have an option, exercisable until completion of the
first Phase II trial for MEM 1003, to acquire a non-exclusive, world-wide license to certain Bayer
patents and know-how relating to certain controlled release formulations developed for Bayer for an
unrelated product. Under the agreement, we must use commercially reasonable efforts to develop
products using the compound covered by this agreement and to commercialize those products in the
US, Japan and four countries of the European Union to be selected by us. Bayer is under no
obligation to provide us with any assistance in the development and commercialization of products
covered by the agreement. Under the license agreement, we made an upfront payment of $250,000 to Bayer as well as a
milestone payment of $750,000 upon initiation of Phase I clinical trials. We are required to make
additional payments of up to $19.0 million upon the achievement of specified milestones, including
a $1.0 million milestone payment upon the commencement of Phase II clinical trials. We are also 13




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obligated to pay royalties during the term of the agreement based on a specified percentage of
worldwide net sales of products covered by the license agreement, which increases at increasing net
sales levels and varies depending on whether the sales are made by us or by a sub-licensee. Royalty
payment obligations will end on a country by country basis upon the expiration of the last patent
rights in a given country or after ten years from the first commercial sale of a product covered by
the license agreement in a given country, whichever is longer. The license agreement may be terminated by either party following an uncured breach by the
other party. Bayer also has the right to terminate the license agreement if we fail to make timely
payments of any amounts due to Bayer under the license agreement. Unless otherwise terminated, the
agreement terminates upon the expiration of the last-to-expire patent rights granted under the
agreement. Issued patents from the US, Germany, France, Italy, Great Britain and Spain, the largest
markets in which patents covered by the agreement have been issued, expire in late 2014 through
2015, although they are eligible for patent term extensions of up to five years. Patent
applications are pending in Japan and Canada. Upon termination of the license agreement for any
reason, other than an uncured breach by Bayer, all rights and licenses granted to us under the
license agreement will terminate. In addition, upon termination of the license agreement as a
result of our uncured breach, at Bayers request we will also have to disclose and transfer all of
the rights we may have to the data and results, including any inventions, of our development
efforts relating to MEM 1003. INTELLECTUAL PROPERTY Our success depends in part on our ability to obtain and maintain intellectual property protection
for our drug candidates, technology and know-how, to operate without infringing the proprietary
rights of others and to prevent others from infringing our proprietary rights. Our policy is to
seek to protect our chemical compounds and technologies by, among other methods, filing US and
foreign patent applications related to our proprietary technology, inventions and improvements that
are important to the development of our business. We also rely on trade secrets, know-how,
continuing technological innovation and in-licensing opportunities to develop and maintain our
proprietary position. 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 product candidates as well as uses of new chemical entities in the
treatment of CNS diseases. In total, as of March 10, 2005, we owned or licensed from Bayer seven
issued US patents, 33 pending US patent applications, 110 issued foreign patents and 160 pending
foreign patent applications. 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 issue 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 products. In addition, the rights
granted under any issued patents may not provide us with competitive advantages against competitors
with similar compounds or technology. 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 drug
candidates 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
advantage of the patent. We may rely, in some circumstances, on trade secrets to protect our technology. However, trade
secrets are difficult to establish and enforce. We seek to protect our proprietary technology and
processes, in part, by confidentiality agreements with our employees, consultants, scientific
advisors and other contractors. These agreements may be breached, and we may not have adequate
remedies for any breach. In addition, our trade secrets may otherwise become known or be
independently discovered by competitors. To the extent that our employees, consultants 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. MEM 1003 As a result of our in-licensing agreement with Bayer, we have rights to several patents and patent
applications, including five issued US patents, one pending US patent application, 109 issued
foreign patents, and 24 pending foreign patent applications relating to MEM 1003. Issued patents
from the US, Germany, France, Italy, Great Britain and Spain, the largest markets in which patents
covered by the Bayer agreement have been issued, expire in late 2014 through 2015, although they
are eligible for patent term extensions of up to five years. 14




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PDE4 inhibitors We have two issued US patents, 17 pending patent applications in the US, one issued foreign patent,
and 127 pending foreign patent applications for both chemistries and research tools relating to our
PDE4 inhibitors, including MEM 1414 and MEM 1917. We have identified four different classes of
chemical compounds that act as PDE4 inhibitors. One issued patent and several pending applications
include claims relating to compounds as well as the methods of manufacturing and using them. One
issued US patent and several pending patent applications are drawn to research tools relating to
materials and methods useful for screening relating to PDE4. Nicotinic alpha-7 partial agonists We have 12 pending US patent applications and six pending foreign patent applications for both
chemistries and research tools relating to our nicotinic alpha-7 partial agonists, including MEM
3454. Our patent applications relate to three classes of nicotinic alpha-7 partial agonists as well
as related research tools including genes and methods useful for screening. PDE10A inhibitor program We have two pending US patent applications and one pending foreign patent application for both
chemistries and research tools relating to our PDE10A inhibitors. Our patent applications relate
to two classes of PDE10A inhibitors as well as related research tools including genes and methods
useful for screening. General research tools We have one pending patent application in the US and one foreign patent application relating to our
general research tools. These patent applications relate to research tools, including methods and
genes, which are applicable to different programs. Trademarks Our trademarks are covered by various pending applications and registrations in the US Patent and
Trademark Office and similar agencies in the European Union and certain other countries. We have
applied for or received trademark protection as set forth below.  Ø
    We have a pending application in the US and registrations in Australia, the European
Union and Mexico for MEMORY PHARMACEUTICALS TM.Ø
    We have pending applications in the US, European Union, Canada, and Mexico, and
registrations in Australia, Japan, Hong Kong and Mexico for the MEMORY design logo.Ø
    We have a pending application for SCIENCE WORKING FOR THE MIND TM
in the US. COMPETITION The development and commercialization of new drugs and drug delivery technologies is highly
competitive. We and/or our collaborators will face competition with respect to any of our products
developed or commercialized in the future from major pharmaceutical companies, specialty
pharmaceutical companies and biotechnology companies worldwide. Many of our competitors possess
greater financial, managerial, scientific and technical resources and have longer operating
histories and established reputations for successfully developing and marketing drugs, 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,
technologies and methods of preventing the incidence of disease, such as vaccines, occur in the
pharmaceutical industry at a rapid pace. These developments may render our drug candidates or
technologies obsolete or non-competitive. Additionally, various large pharmaceutical companies, universities and public agencies are
developing and using technologies to treat cognitive disorders directly as well as other
neurological and psychiatric illnesses which may have the ancillary benefit of treating memory and
other cognitive disorders. Many of these entities have significant experience in preclinical
testing, human clinical trials, product manufacturing, marketing and distribution and the
regulatory approval process. Many companies also have substantially greater resources and are
developing or using technologies that may be competitive with our products and technologies. There are several global pharmaceutical companies with drugs in the marketplace for the
treatment of Alzheimers disease, schizophrenia and depression. Acetylcholinesterase inhibitors for
the treatment of Alzheimers disease include Aricept (Pfizer), 15




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Reminyl (Johnson and Johnson) and Exelon (Novartis). The only NMDA-receptor antagonist for the
treatment of moderate to late stage Alzheimers disease in the US is Namenda (Forest Laboratories).
The SSRI antidepressant market includes Prozac (Eli Lilly), Paxil (GlaxoSmithKline), Zoloft
(Pfizer), Celexa (Forest Laboratories) and Lexapro (Forest Laboratories). The only approved dual
uptake inhibitor for the treatment of depression is Effexor (Wyeth). The antipsychotics on the
market for the treatment of schizophrenia include Zyprexa (Eli Lilly), Risperdal (Johnson and
Johnson) and Abilify (Bristol-Myers Squibb). We are aware that there are many drugs under development by both large pharmaceutical companies and
small biotechnology companies for additional treatments of Alzheimers disease, schizophrenia and
depression as well as potential therapies for vascular dementia and MCI. We believe that our ability to successfully position ourselves within this competitive environment
will depend on, among other things:  Ø
    efficacy, safety and reliability of our drug candidates;Ø
    the speed at which we or our collaborators develop drug candidates;Ø
    completion of clinical development and laboratory testing of our drug candidates;Ø
    timing and scope of regulatory approval of our drug candidates;Ø
    our or our collaborators ability to manufacture and sell commercial quantities of approved products in the market;Ø
    product acceptance by physicians and other health care providers;Ø
    skills of our employees and our ability to recruit and retain skilled employees;Ø
    protection of our intellectual property; andØ
    availability of substantial capital resources to fund development and commercialization
activities by us and our collaborators. GOVERNMENT REGULATION Government authorities in the US and in other countries extensively regulate, among other things,
the research, development, testing, manufacture, labeling, promotion, advertising, distribution,
marketing, and export and import of pharmaceutical products such as those we are developing. We
cannot assure you that any of our drug candidates will prove to be safe or effective, will receive
regulatory approvals or will be successfully commercialized. US regulatory approval In the US, drugs and drug testing are regulated by the FDA, as well as state and local government
authorities. Before our products may be marketed in the US, we must comply with the Federal Food,
Drug and Cosmetic Act, which generally involves the following:  Ø
    preclinical laboratory and animal tests performed under the FDAs Good Laboratory
Practices regulations (GLPs);Ø
    submission and acceptance of an IND application, which must become effective before
clinical trials may begin in the US;Ø
    adequate and well-controlled human clinical trials to establish the safety and efficacy
of the drug candidate in our intended use;Ø
    development of manufacturing processes which conform to FDA-mandated current Good
Manufacturing Practices (GMPs); andØ
    FDA review and approval of a New Drug Application (NDA) prior to any commercial sale or
shipment of a product. The testing and approval process requires substantial time, effort and financial resources, and we
cannot be certain that any approval will be granted on a timely basis, if at all. In addition,
final regulatory approval and/or the speed of regulatory approval may depend on conditions and
events prevailing in the pharmaceutical industry that are outside our control. Preclinical tests Preclinical tests include laboratory evaluation of the drug candidate, its chemistry, formulation
and stability, as well as animal studies to assess the potential safety and efficacy of the drug
candidate. The results of the preclinical tests, together with manufacturing information,
analytical data and other available information about the drug candidate, are submitted to the FDA
as part of an IND. An IND is a request for FDA authorization to administer an investigational drug
to humans. Such authorization must be secured prior to interstate shipment and administration of
any new drug that is not the subject of an approved new drug application. Preclinical tests 16




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and studies can take several years to complete, and despite completion of those tests and studies
the FDA may not permit clinical testing to begin. The IND process The FDA requires a 30-day waiting period after the filing of each IND application before clinical
trials may begin. This waiting period is designed to allow the FDA to review the IND to determine
whether human research subjects will be exposed to unreasonable health risks. At any time during
this 30-day period or at any time thereafter, the FDA may raise concerns or questions about the
conduct of the trials as outlined in the IND and impose a clinical hold. In this case, the IND
sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin or
continue. The IND application process may become extremely costly and substantially delay
development of our products. Moreover, positive results of preclinical tests will not necessarily
indicate positive results in clinical trials. Prior to initiation of clinical studies, an independent institutional review board (IRB) at each
medical site proposing to conduct the clinical trials must review and approve each study protocol
and study subjects must provide informed consent. Clinical trials Human clinical trials are typically conducted in three sequential phases that may overlap:  Ø
    Phase I: The drug is initially introduced into healthy human
subjects or patients and tested for safety, dosage tolerance,
absorption, distribution, excretion and metabolism.Ø
    Phase II: The drug is introduced into a limited patient population
to: (1) assess the efficacy of the drug in specific, targeted
indications; (2) assess dosage tolerance and optimal dosage; and
(3) identify possible adverse effects and safety risks.Ø
    Phase III: These are commonly referred to as pivotal studies. If a
compound is found to have an acceptable safety profile and to be
potentially effective in Phase II trials, new clinical trials will
be initiated to further demonstrate clinical efficacy, optimal
dosage and safety within an expanded and diverse patient
population at geographically dispersed clinical study sites. We cannot be certain that we will successfully complete Phase I, Phase II or Phase III testing of
our drug candidates within any specific time period, if at all. Clinical testing must meet
requirements for IRB, oversight, informed consent and good clinical practices. The FDA, and the IRB
at each institution at which a clinical trial is being performed, may suspend a clinical trial at
any time for various reasons, including a belief that the subjects are being exposed to an
unacceptable health risk. The NDA process If clinical trials are successful, the next step in the drug regulatory approval process is the
preparation and submission to the FDA of an NDA. The NDA is the vehicle through which drug sponsors
formally propose that the FDA approve a new pharmaceutical for marketing and sale in the US. The
NDA must contain a description of the manufacturing process and quality control methods, as well as
results of preclinical tests, toxicology studies, clinical trials and proposed labeling, among
other things. A substantial user fee must also be paid with the NDA, unless an exemption applies.
Every new drug must be the subject of an approved NDA before US commercialization. Upon submission of the NDA, the FDA will make a threshold determination of whether the application
is sufficiently complete to permit review, and if not will issue a refuse to file letter. If the
application is accepted for filing, the FDA will attempt to review and take action on the
application in accordance with performance goal commitments the FDA has made in connection with the
user fee law. These timing commitments will vary depending on whether an NDA is for a priority drug
or not, and in any event are not a guarantee that an application will be approved or even acted
upon by any specific deadline. The review process is often significantly extended by FDA requests
for additional information or clarification. The FDA may refer the NDA to an advisory committee for
review, evaluation and recommendation as to whether the application should be approved, but the FDA
is not bound by the recommendation of an advisory committee. The FDA may deny or delay approval of
applications that do not meet applicable regulatory criteria or if the FDA determines that the
clinical data do not adequately establish the safety and efficacy of the drug. In addition, the FDA
may approve a drug candidate subject to the completion of post-marketing studies, referred to as
Phase IV trials, to monitor the effect of the approved product. The FDA may also grant approval
with restrictive product labeling, or may impose other restrictions on marketing or distribution
such as the adoption of a special risk management plan. The FDA has broad post-market regulatory
and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay
issuance of approvals, seize or recall products, and withdraw approvals. 17




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Manufacturing and post-marketing requirements If approved, a drug may only be marketed in the dosage forms and for the indications approved in
the NDA. Special requirements also apply to any drug samples that are distributed in accordance
with the Prescription Drug Marketing Act. The manufacturers of approved products and their
manufacturing facilities will be subject to continual review and periodic inspections by the FDA
and other authorities where applicable, and must comply with ongoing requirements, including the
FDAs GMP requirements. Once the FDA approves a product, a manufacturer must provide certain
updated safety and efficacy information, submit copies of promotional materials to the FDA
periodically, and make certain other required reports. Product and labeling changes, as well as
certain changes in a manufacturing process or facility or other post-approval changes, may
necessitate additional FDA review and approval. Failure to comply with the statutory and regulatory
requirements subjects the manufacturer to possible legal or regulatory action, such as warning
letters, suspension of manufacturing, seizure of product, voluntary recall of a product, injunctive
action or possible civil penalties. Product approvals may be withdrawn if compliance with
regulatory requirements is not maintained or if problems concerning safety or efficacy of the
product occur following approval. Because we intend to contract with third parties for
manufacturing of our products, our ability to control third-party compliance with FDA requirements
will be limited to contractual remedies and rights of inspection. Failure of third-party
manufacturers to comply with GMP or other FDA requirements applicable to our products may subject
us to fines and could result in, among other things, total or partial suspension of production,
failure of the government to grant approval for marketing, and withdrawal or suspension of
marketing approvals. The FDAs policies may change and additional government regulations may be enacted which could
prevent or delay regulatory approval of our drug candidates. Moreover, increased attention to the
containment of health care costs in the US and in foreign markets could result in new government
regulations that could have a material adverse effect on our business. We cannot predict the
likelihood, nature or extent of adverse governmental regulation that might arise from future
legislative or administrative action, either in the US or abroad. We are also subject to various laws and regulations regarding laboratory practices, the
experimental use of animals and the use and disposal of hazardous or potentially hazardous
substances in connection with our research. Foreign regulatory approval We will have to complete approval processes, similar or related to the US approval processes, in
virtually every foreign target market for our products in order to conduct clinical or preclinical
research and to commercialize our drug candidates in those countries. The approval procedures and
the time required for approvals vary from country to country and may involve additional testing.
Foreign approvals may not be granted on a timely basis, or at all. In addition, regulatory approval
of prices is required in most countries other than the US. We face the risk that the resulting
prices would be insufficient to generate an acceptable return to us or our collaborators. In common with the US, the various phases of preclinical and clinical research are subject to
significant regulatory controls within the European Union. Variations in the national regimes
exist. However, most jurisdictions require regulatory and IRB approval of interventional clinical
trials. Most European regulators also require the submission of adverse event reports during a
study and a copy of the final study report. Under European Union regulatory systems, marketing authorizations may be submitted either under a
centralized or decentralized procedure. The centralized procedure is currently mandatory for
products developed by means of a biotechnological process and optional for new active substances
and other innovative medicinal products with novel characteristics. It provides for the grant of
a single marketing authorization that is valid for all European Union member states. The
decentralized procedure provides for mutual recognition of national approval decisions. Under this
procedure, the holder of a national marketing authorization may submit applications in other
European Union member states, requesting them to mutually recognize the marketing authorization
already granted. Within 90 days of receiving the applications and assessment report, each member
state must decide whether to recognize the existing approval. Where possible, we plan to choose the appropriate route of European regulatory filing in an
attempt to accomplish the most rapid regulatory approvals. However, the chosen regulatory strategy
may not secure regulatory approvals or approvals of the chosen product indications. In addition,
these approvals, if obtained, may take longer than anticipated. Other regulatory matters In the US, our manufacturing, sales, promotion, and other activities following any product approval
are subject to regulation by regulatory authorities in addition to the FDA, including the FTC, the
Department of Justice, the Centers for Medicare & Medicaid Services, other divisions of the
Department of Health and Human Services, and state and local governments. Among other laws and 18




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requirements, our sales, marketing and scientific/educational programs will need to comply with the
anti-kickback provisions of the Social Security Act, the False Claims Act and similar state laws.
Our pricing and rebate programs will need to comply with pricing and reimbursement rules, including
the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990. If products are
made available to authorized users of the Federal Supply Schedule of the General Services
Administration, additional laws and requirements apply. All of our activities are potentially
subject to federal and state consumer protection and unfair competition laws. Finally, certain
jurisdictions have other trade regulations from time to time to which our business is subject such
as technology or environmental export controls and political trade embargoes. Depending on the circumstances, failure to meet these applicable regulatory requirements can
result in criminal prosecution, fines or other penalties, injunctions, private qui tam actions
brought by individual whistleblowers in the name of the government, or refusal to allow us to enter
into supply contracts, including government contracts. We are also subject to federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard control and disposal of
hazardous or potentially hazardous substances. We may incur significant costs to comply with such
laws and regulations now or in the future. MANUFACTURING In general, our strategy is to produce small quantities (up to gram quantities) of our
compounds for preclinical testing and to contract out with third parties for manufacturing of
larger quantities. All of our compounds are small molecules, generally require no special
manufacturing processes and use relatively accessible raw materials. Due to their relative ease of
manufacture, we can choose among several suppliers. Roche currently supplies MEM 1414 and MEM 1917
for use in our collaborative efforts, and we currently outsource to other third parties production
of MEM 1003 and MEM 3454 and will outsource the production of MEM
63908. EMPLOYEES As of March 1, 2005, we had 83 full-time employees. Of our workforce, 70 employees are engaged in
research and development and 13 are engaged in business development, finance and administration.
None of our employees is represented by labor unions or covered by collective bargaining
agreements. We have not experienced any work stoppages and consider our employee relations to be
good. CORPORATE INFORMATION We were incorporated on March 19, 1997 in the state of Delaware. Our website address is
www.memorypharma.com. ADDITIONAL INFORMATION AND WHERE TO FIND IT Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 are available on our website (www.memorypharma.com under the Investors  SEC
Filings captions) as soon as reasonably practicable after we electronically file such material
with, or furnish them to, the Securities and Exchange Commission (SEC). 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 year ended
December 31, 2004 was $24.1 million, and as of December 31, 2004, we had an accumulated deficit of
approximately $120.4 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 significantly expand our clinical trial activity, increase the
number of our development programs, and potentially in-license and acquire technologies. As a
result, we will need to generate significant revenue or obtain external financing to pay these
costs. 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 novel drug
candidates based on our understanding of the role played by certain biological targets in memory
formation and cognition. All of our current drug candidates are at an early stage of development.
We have only one drug candidate for which we have completed Phase I clinical trials and two drug
candidates which are currently in Phase I clinical trials. The balance of our activities is focused
on the preclinical development of MEM 63908 and the identification and optimization of compounds from our PDE10A
program, and our exploratory
research programs to address biological targets that may be implicated in memory and other
cognitive functions. 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. 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. In addition, because we have limited resources, we are focusing on
targets, compounds and indications that we believe are the most promising. As a result, we may
forego or delay pursuit of opportunities with other targets, compounds and indications. The diseases we are targeting are poorly understood, which increases our chances of failure. Our drug development programs principally target a broad range of CNS 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 schizophrenia and
depression. 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
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We may not be able to succeed in our business model of seeking to enter into collaborations at
early stages of development. We currently do not have a collaboration partner for MEM 1003, our
most clinically advanced program. Our current strategy for developing, manufacturing and commercializing our drug candidates includes
securing collaborations with pharmaceutical and biotechnology companies relatively early in the
drug development process and for these collaborators to undertake the advanced clinical development
and commercialization of our drug candidates. We have entered into only two collaborations to date,
both of which are with Roche and were entered into prior to commencing clinical trials. It may be
difficult for us to find third parties that are willing to enter into collaborations for our other
drug candidates at an early stage of development or on economic terms that are comparable to the
terms of our collaborations with Roche if at all. If we do enter into collaborations or other
arrangements for our other drug candidates, we may not accurately evaluate the commercial potential
or target market for a drug candidate and may relinquish valuable rights to that drug candidate. If we are not able to continue to enter into collaborations for our drug candidates at relatively
early stages, we could be required to undertake and fund further development, clinical trials,
manufacturing and marketing activities solely at our own expense. For example, we are funding a safety and tolerability study and currently intend to fund our Phase IIa clinical trials for MEM 1003, which we are in the process of designing,
ourselves. However, we are also exploring the potential for a collaboration for MEM 1003. If, following the
completion of Phase IIa trials, we have been unable to find a collaboration partner for MEM 1003,
we may at that time 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 or retain 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 delay, substantially reduce or cease
our efforts on certain of our proposed products and drug candidates and our exploratory programs. 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.
Our collaborators 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. In addition, under our 2003 Roche collaboration, Roche
has the right to obtain an exclusive license for any product covered by that agreement, which currently includes MEM 3454 and MEM 63908,
following the completion of Phase IIa
clinical trials by making payments to us upon our achievement of certain developmental milestones.
Alternatively, Roche has the right to terminate its license option
with respect to MEM 3454, MEM 63908 or any
other product covered by that agreement on a product-by-product basis at certain times during the
development of the product. If Roche chose not
to maintain its license option with respect to a product under our 2003 agreement, we would not receive further
milestone payments or other support from Roche for that products continued development. 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 may 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
vitroassays and animal models in order to obtain early indications of efficacy and safety. We have
invested in and continue to invest substantial resources in this capability. However, since none of
our drug candidates has progressed past 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 FDA, or by
similar agencies in other countries. 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
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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 preclinical studies,
these candidates may not prove to 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 subsequent preclinical animal
tests conducted by Roche, MEM 1414 has caused adverse side effects, which in one study, resulted in
deaths at high doses in one of two species tested. Roche is conducting 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, as well as potentially affect Roches development plans
for MEM 1917. 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 US, principally the FDA, and by similar agencies in other
countries. The requirements that clinical trials must meet include IRB or ethics committee
oversight, informed consent and good clinical practices. 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. Three of our drug candidates, MEM 1003, MEM 1414 and MEM 3454, are currently undergoing clinical
trials. Other than MEM 1003, none of these candidates has progressed past Phase I clinical trials and all such Phase I
trials have been or are being conducted in Europe or Canada. In order for us or our collaborators
to conduct human clinical trials in the US for these or other drug candidates, we or they must
obtain and maintain an effective IND from the FDA. While we have obtained an IND for MEM 1003, we
cannot assure you that we or our collaborators will be successful in obtaining an IND for any other
drug candidate. In connection with obtaining an IND, we or our collaborators 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, on the FDAs
recommendation, we are conducting an additional three-month animal
toxicology study of MEM 1003 at higher doses
than were previously studied, the results of which will accompany our submission to commence Phase
IIa for MEM 1003. We believe that the results of this toxicology study, in combination with the
results of the Alzheimers patient safety and tolerability study which we are also conducting, will
provide a more comprehensive data package for MEM 1003. 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. If we are unable to satisfy the FDA with
the results of the current studies that we are conducting with respect to MEM 1003, we may face
delays in proceeding with Phase IIa clinical trials for MEM 1003 in the US, or we could be
prevented from proceeding with MEM 1003 in the US. In addition, if we are unable to complete the
safety and tolerability study on the time schedule that we have planned, we may be unable to
initiate Phase IIa by the end of the first half of 2005 as planned. 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 could 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 delays in the completion of the
preclinical test or clinical study, or 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;Ø
    the FDA or foreign regulatory authority could impose conditions on the scope or design
or a clinical trial; 23




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Ø
    the FDA or foreign regulatory authority could 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 or foreign regulatory authority might not approve the manufacturing processes
or facilities that we utilize, or the processes or facilities of our collaborators;Ø
    we may encounter delays in obtaining IRB approval to conduct a clinical trial at a
prospective study site or to revise a clinical trial protocol after
the clinical trial has
commenced;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 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;Ø
    our clinical trials may not demonstrate the safety and efficacy of our compounds or
result in marketable products; andØ
    we or our collaborators may encounter delays in obtaining a sufficient supply of a drug
candidate for use in our clinical trials as a result of manufacturing or quality assurance
issues. In addition, we or our collaborators may encounter delays based on our inability to enroll or
retain a sufficient number of healthy volunteers or patients to complete our clinical trials. This
could affect both our ability to complete a clinical trial in the time frame we have planned and
its validity or statistical significance. Enrollment depends on many factors, including: the size of the patient population, the
nature of the trial protocol, the proximity of volunteers/patients to clinical sites, the
eligibility criteria for the study and whether recruitment from the same patient population is ongoing for clinical trials by other companies.
For example, in preparation for a Phase IIa study of MEM 1003,
in January 2005, we commenced a safety and tolerability study in patients with Alzheimers disease, which has been extended as a result of slower than expected patient enrollment and our
decision to increase the number of patients being studied. While we currently expect to commence
our Phase IIa study by the end of the first half of 2005, our ability to do so will depend upon our
achieving patient enrollment sufficient not only to complete the safety and tolerability study but
also to commence the Phase IIa study in the time frame that we have planned. Delays in planned
patient enrollment for a clinical study result in increased costs, program delays or both, which
could have a harmful effect on our ability to develop products. We cannot assure you that we will
achieve sufficient patient enrollment to complete the safety and tolerability study and commence
the Phase IIa study on the time schedule that we have planned. We cannot assure you that our clinical trials will commence or proceed on schedule. Delays in our
clinical trials or rejections of data from a clinical trial will result in increased development
costs and could have a material adverse effect on the development of our drug candidates. We will need additional financing, which may be difficult to obtain. Our failure to obtain
necessary financing, or obtaining financing on unattractive terms, would adversely affect our
development programs and other operations. Although we believe that our existing cash and cash equivalents, and marketable securities, together with
payments for research and development services 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 the first quarter of 2006, if our actual expenses are higher
than anticipated or our
business or operations change, we may 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 or our PDE10A inhibitor program and the terms of any such collaboration; 24




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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 costs involved in utilizing third party contract research organizations for
preclinical studies and clinical trials;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; and,Ø
    the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims and other patent-related costs, including litigation costs and the results of such
litigation. We may not be able to obtain additional financing when we need it or on acceptable terms. If we
are unable to obtain adequate financing on a timely basis, we will have to reduce or delay our
efforts on certain of our proposed products and drug candidates and our exploratory programs. In
addition, we may have to 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 would 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, schizophrenia
and depression as well as potential therapies for vascular dementia and MCI. We depend on our key scientific and other key personnel and have recently experienced turnover in
our key senior management. If we are not able to retain our key scientific and other key personnel
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 President and Chief Executive
Officer, Dr. David A. Lowe, our Chief Scientific 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 without 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 have experienced turnover in our senior management. In December 2004, we announced the
departure of our Chief Financial Officer, Dennis M. Keane. Most recently, we announced the departure
of Axel J. Unterbeck, Ph.D., our President and Co-founder. While both of these individuals left for personal reasons,
continued turnover of senior management
may affect investor confidence in us and adversely impact our business and our stock price. We have added new 25




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members to our senior management team, but it may take time for these individuals to be fully integrated into our organization.
If our management team is unable to
work together effectively to implement our strategies and manage our operations and accomplish our
business objectives, our ability to grow our business and successfully meet our objectives could be
severely impaired. In addition, 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 contract research organizations do not perform in an acceptable and timely manner,
our preclinical testing or clinical trials could be delayed or unsuccessful. We do not have the ability to conduct our preclinical testing or clinical trials independently and
have limited experience in conducting clinical trials. In addition to our collaborators, we rely
and will continue to rely on preclinical and clinical investigators, third-party contract research
organizations and consultants to perform some or all of the functions associated with preclinical
testing or clinical trials. From time to time, preclinical and clinical investigators, third-party
contract 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
preclinical testing or clinical trials. However, the failure of any vendor to perform in an
acceptable and timely manner in the future, including in accordance with any applicable regulatory
requirements or preclinical testing or clinical trial protocol, could cause a delay or other
material adverse effect on our preclinical testing, clinical trials and ultimately on the timely
advancement of our development programs. If we or our collaborators cannot locate acceptable contractors to run a portion of our or our
collaborators preclinical testing or 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 US 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 US and must obtain and maintain regulatory approval for
commercial distribution. This process is expensive, uncertain and takes many years. In order to
obtain regulatory clearance to conduct clinical trials in the US and eventually obtain approval in
the US, 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. In addition, during the clinical development of our drug candidates, the policies of the FDA
may change and additional regulations may be enacted which
could prevent or delay regulatory approval of our drug candidate. Moreover, increased attention to
the containment of health care costs in the US and in foreign markets could result in new
government regulations that could have a material adverse effect on our business. We cannot
predict the likelihood, nature or extent of adverse governmental regulation that might arise from
future legislative or administrative action, either in the US or abroad. 26




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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 US 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 or if
the pricing for these products is set at unsatisfactory levels by foreign countries. 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. 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 for our clinical trials in accordance with our specifications and
timely deliver the drug candidates to the appropriate clinical trial sites, 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
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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. 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. We cannot control these manufacturing facilities compliance with FDA requirements and
may be limited to certain contractual remedies and rights of inspection. If these manufacturing
facilities fail to comply with applicable regulatory requirements, we may not be granted approval
for marketing, and we could, among other things, be subject to fines, total or partial suspension
of production, 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. 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
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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 US 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. 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
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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 US 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 US. 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 US, 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. We also may be required to pay substantial damages to the patent holder in the event of an
infringement. Under some circumstances in the US, 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. 30




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Risks Related to our Common Stock Our executive officers, directors and major stockholders have the ability to significantly
influence all matters submitted to stockholders for approval. As of March 1, 2005, 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 21% 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;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: 31




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##### Table of Contents



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. 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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##### Table of Contents



Item 2. Properties. We currently lease approximately 66,200 square feet of laboratory and office space in
Montvale, New Jersey. Our lease will expire in 2014 if not renewed in advance. We occupy
approximately 54,700 square feet of this space, with approximately 46,500 square feet used for
research and development activities and approximately 8,200 square feet used for general
administrative purposes. In 2004 we built out and expanded into an additional 17,400 square feet
for research and development purposes. An additional 11,500 square feet are available to us for
future expansion. 
 Item 3. Legal Proceedings We currently are not a party to any material legal proceedings. 
 Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of security holders during the fourth quarter of 2004. 33




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PART II 
 Item 5. Market for
Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities. Our common stock has been quoted on the Nasdaq National Market under the symbol MEMY since our
initial public offering on April 5, 2004. Prior to that date, there was no public market for our
common stock. The following table sets forth, for the periods indicated, the high and low bid
prices per share of our common stock as reported on the Nasdaq National Market. High
    
    
    LowYear Ended December 31, 2004:Fourth Quarter
    
    $
    7.75
    
    
    $
    4.99Third Quarter
    
    
    9.71
    
    
    
    6.56Second Quarter
    
    
    10.90
    
    
    
    6.52
 As of March 28, 2005, we had approximately 125 holders of record of our common stock. Dividend Policy We have never declared or paid cash dividends on our common stock. We do not anticipate paying
any cash dividends on our capital stock in the foreseeable future. We currently intend to retain
all available funds and any future earnings to fund the development and growth of our business. Equity Compensation Plan Information The following table provides information as of December 31, 2004 with respect to shares of our
common stock that may be issued under our existing equity compensation plans: Number of
    
    
    
    
    
    
    Number of SecuritiesSecurities
    
    
    Weighted
    
    
    Remaining Available forto be Issued Upon
    
    
    Average
    
    
    Future Issuance UnderExercise
    
    
    Exercise Price of
    
    
    Equity Compensationof Outstanding
    
    
    Outstanding
    
    
    Plans (ExcludingOptions,
    
    
    Options, Warrants
    
    
    Securities ReflectedPlan Category
    
    Warrants and Rights
    
    
    and Rights
    
    
    in Column (a))(a)
    

    
    (b)
    
    
    (c)Equity Compensation
Plans Approved by
Security Holders
(1)
    
    
    2,989,538
    (2)
    
    $
    3.57
    
    
    
    467,791
    (3)Equity Compensation
Plans Not Approved
by Security Holders
(4)
    
    
    119,907
    
    
    $
    12.69
    
    
    
    Total
    
    
    3,109,445
    
    
    $
    3.92
    
    
    
    467,791
   (1)
    
    Includes options to purchase shares of our common stock under our 2004 Stock Incentive Plan
(the 2004 Plan) and shares of common stock issued under our 2004 Employee Stock Purchase
Plan (ESPP).(2)
    
    Excludes purchase rights accruing under the ESPP, which has a stockholder-approved reserve of
200,000 shares of common stock as of December 31, 2004. Under the ESPP, eligible employees
may purchase shares of our common stock through payroll deductions of up to 10% of their
eligible compensation. The price paid by the employee is 85% of the fair market value on the
offering date or the last day of the purchase period. There are two purchase periods per
year. For the year ended December 31, 2004, the offering periods commenced on April 5 and
August 1.(3)
    
    Consists of shares available as of December 31, 2004 for future issuance under the 2004 Plan
and the ESPP. 34




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##### Table of Contents



(4)
    
    Consists of the following warrants to purchase shares of our common stock issued prior to our
initial public offering, warrants to purchase 115,740 shares at an exercise price of $12.96
per share, which expire in August 2008 and warrants to purchase 4,167 shares at an exercise
price of $5.25 per share, which expire in March 2010. 
 Item 6. Selected Financial Data. Years Ended December 31,(in thousands, except per share data)2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Statement of Operations Data:Revenue
    
    $
    9,780
    
    
    $
    7,618
    
    
    $
    1,183
    
    
    $
    
    
    
    $
    Research and development expenses
    
    
    26,975
    
    
    
    22,626
    
    
    
    21,951
    
    
    
    10,711
    
    
    
    6,849General and administrative expenses
    
    
    7,393
    
    
    
    7,111
    
    
    
    4,489
    
    
    
    3,421
    
    
    
    2,312Interest income / (expense), net
    
    
    243
    
    
    
    (3
    )
    
    
    115
    
    
    
    276
    
    
    
    810Net Loss
    
    
    (24,096
    )
    
    
    (21,786
    )
    
    
    (25,163
    )
    
    
    (13,856
    )
    
    
    (8,351
    )Redeemable convertible preferred
stock dividends, accretion, and
beneficial conversion feature
    
    
    2,022
    
    
    
    7,493
    
    
    
    5,889
    
    
    
    2,962
    
    
    
    1,888Net loss attributable to common
stockholders
    
    
    (26,118
    )
    
    
    (29,279
    )
    
    
    (31,052
    )
    
    
    (16,818
    )
    
    
    (10,239
    )Basic and diluted net loss per share of
common stock
    
    
    (1.67
    )
    
    
    (30.07
    )
    
    
    (48.10
    )
    
    
    (30.67
    )
    
    
    (19.10
    )Weighted average shares
outstanding  basic and diluted
    
    
    15,605,985
    
    
    
    973,637
    
    
    
    645,615
    
    
    
    548,431
    
    
    
    536,166
 December 31,(in thousands)2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Balance Sheet Data:Cash, cash equivalents and
marketable securities
    
    $
    41,096
    
    
    $
    30,107
    
    
    $
    29,474
    
    
    $
    7,282
    
    
    $
    21,757Working capital
    
    
    28,740
    
    
    
    21,038
    
    
    
    22,761
    
    
    
    3,873
    
    
    
    19,001Total assets
    
    
    53,397
    
    
    
    43,434
    
    
    
    39,797
    
    
    
    14,557
    
    
    
    27,146Equipment notes payable
    
    
    3,520
    
    
    
    3,787
    
    
    
    3,986
    
    
    
    2,805
    
    
    
    2,224Accumulated deficit
    
    
    (120,434
    )
    
    
    (94,316
    )
    
    
    (65,037
    )
    
    
    (33,985
    )
    
    
    (17,167
    )Total stockholders equity / (deficit)
    
    
    27,442
    
    
    
    (89,457
    )
    
    
    (64,556
    )
    
    
    (33,922
    )
    
    
    (17,150
    )
 35




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with our financial statements and
related notes thereto included in this Annual Report on Form 10-K. 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 five clinical and preclinical drug candidates in development, as well as other
drug discovery programs addressing specific CNS targets. We do not currently have any commercial
products for sale and do not anticipate having any commercial products for sale within the
foreseeable future. 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 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
MCI and also include certain psychiatric disorders such as
schizophrenia and depression. 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 December 31, 2004, we had
received $45.4 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 funding our research collaboration efforts for a minimum of 18 months in the aggregate amount
of $5.3 million, payable quarterly commencing September 9, 2004. In July 2001, we entered into an agreement with Bayer for the in-license of the compound we refer
to as MEM 1003. As of December 31, 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 due upon the commencement of Phase IIa clinical trials, which are currently scheduled to
commence by the end of the first half of 2005) and to pay royalties on sales of any products
incorporating the licensed compound. Since our inception, we have incurred substantial losses, and as of December 31, 2004, we had an
accumulated deficit of $120.4 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 drug discovery and
development programs. Our operating expenses may also vary substantially from year-to-year and quarter-to-quarter based
on the timing and level of our preclinical 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 are funding a safety and tolerability study of MEM 1003 in Alzheimers
patients and intend to fund Phase IIa clinical trials for MEM 1003 ourselves. However, we are also exploring the potential for a collaboration for MEM 1003.
If, following the completion of Phase IIa trials, we have been unable to find a collaboration partner for
MEM 1003, we may at that time choose to continue the program at our own expense. If we do not enter
into a collaboration and decide to advance MEM 1003 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 year or quarter to the next and should not be
relied on as indicative of our future performance. 36




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##### Table of Contents



REVENUE 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. 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. RESEARCH AND DEVELOPMENT EXPENSE Research and development
expense consists primarily of costs associated with our internal
research and development activities, including salaries and related
expenses for personnel, costs of facilities and equipment, fees paid
to contract research organizations and consultants in connection with
our preclinical studies and clinical trials, including for services
such as the independent monitoring of our clinical trials and the
evaluation of data from our clinical trials, costs of materials used
in research and development, upfront and milestone payments under
in-licensing agreements, consulting, license and sponsored research
fees paid to third parties, and depreciation of capital assets used
to develop our drug candidates. We expense both internal and external research and development costs as incurred. We expect our
research and development expense to increase as we continue to
develop our drug candidates. 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 contract research organizations and consultants to perform some or all of the functions
associated with preclinical testing or clinical trials. The failure of any vendor to perform in an
acceptable and timely manner in the future, or in accordance with any
applicable regulatory requirements or preclinical testing or clinical
trial protocol, could cause
a delay or other material adverse effect on our preclinical testing,
clinical trials and ultimately on the timely advancement of our
development programs. If we or our collaborators
cannot locate acceptable contractors to conduct 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 US 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. 37




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##### Table of Contents



To illustrate the material
nature of our reliance on third-party contract research organizations,
the following table shows, from inception through December 31, 2004, the total out-of-pocket
payments made by us to third parties for clinical supplies and preclinical study support and
clinical trials associated with our five compounds currently in preclinical and clinical trials.
The table excludes internal costs for each of the drug candidates and out-of-pocket payments made
by Roche. Drug
    
    
    
    
    
    Target
    
    
    Stage of
    
    
    Year Ended December 31,
    
    Inception toCandidate
    
    Mechanism
    
    
    indication
    
    
    development
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    December 31, 2004(in thousands)MEM 1003
    
    Neuronal L-typecalcium channel
    
    Alzheimersmodulator
    
    disease
    
    Phase I completed
    
    $
    3,449
    
    
    $
    2,708
    
    
    $
    4,762
    
    
    $
    11,135MEM 3454
    
    Nicotinic alpha-7partial agonist
    
    Schizophrenia
    
    Preclinical
    
    
    3,980
    
    
    
    1,126
    
    
    
    196
    
    
    
    5,302MEM 1414
    
    PDE4 inhibitor
    
    Alzheimers disease
    
    Phase I
    
    
    148
    
    
    
    1,081
    
    
    
    1,390
    
    
    
    2,618MEM 1917
    
    PDE4 inhibitor
    
    Alzheimers disease
    
    Preclinical
    
    
    370
    
    
    
    522
    
    
    
    84
    
    
    
    975MEM 63908
    
    Nicotinic alpha-7
    
    Alzheimerspartial agonist
    
    disease
    
    Preclinical
    
    
    184
    
    
    
    
    
    
    
    
    
    
    
    184Total
    
    $
    8,131
    
    
    $
    5,437
    
    
    $
    6,432
    
    
    $
    20,214
 We expect that a large percentage of our research and development expenses in the future will be
incurred in support of our current and future preclinical and clinical development programs. These
expenditures are subject to numerous uncertainties in timing and cost to completion. We test
compounds in numerous preclinical studies for safety, toxicology and efficacy. We then conduct
early stage clinical trials for each drug candidate. If we are not able to engage a collaboration
partner prior to the commencement of later stage clinical trials, we may fund these trials
ourselves. As we obtain results from trials, we may elect to discontinue or delay clinical trials
for certain products in order to focus our resources on more promising products. Completion of
clinical trials by us or our collaborators may take several years or more, but the length of time
generally varies substantially according to the type, complexity, novelty and intended use of a
drug candidate. The cost of clinical trials may vary significantly over the life of a project as a
result of differences arising during clinical development, including, among others:  
    the number of sites included in the trials;
    the length of time required to enroll suitable patient subjects;
    the number of patients that participate in the trials;
    the duration of patient follow-up that seems appropriate in view of results; and
    the efficacy and safety profile of the product. None of our drug candidates has received FDA or foreign regulatory marketing approval. In order to
achieve marketing approval, the FDA or foreign regulatory agencies must conclude that our and our
collaborators clinical data establishes the safety and efficacy of our drug candidates.
Furthermore, our strategy includes entering into collaborations with third parties to participate
in the development and commercialization of our products, such as our two collaborations with
Roche. In the event that third parties have control over the preclinical development or clinical
trial process for a product, the estimated completion date would
largely be under the control of that
third party rather than under our control. We cannot forecast with any degree of certainty which
of our drug candidates will be subject to future collaborations or how such arrangements would
affect our development plan or capital requirements. As a result of the uncertainties discussed above, we are unable to determine the duration and
completion costs of our research and development projects or when and to what extent we will
receive cash inflows from the commercialization and sale of a product. 38




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GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense consists primarily of salaries and other related costs for
personnel serving executive, business development, finance, accounting, information technology,
administrative and human resource functions. Other costs include facility costs not included in
research and development expense, insurance, professional fees for legal and accounting services,
and the legal costs of pursuing patent protection of our intellectual property. We expect that our
general and administrative expenses will increase as we add personnel, increase investor relations
activities, maintain insurance coverage appropriate for a public company and comply with public
company reporting and other obligations. RESULTS OF OPERATIONS Year Ended December 31, 2004 compared to Year Ended December 31, 2003 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, one of which was entered into in 2002 and the other
in 2003. Any additional revenue that we may receive in the future is expected to consist primarily
of upfront license fees, milestone payments, reimbursement for research and development services
and royalty payments from either Roche or from other collaborations. Revenue for the year ended December 31, 2004 was $9.8 million, representing the currently
recognizable portion of upfront license fees, milestone payments, and fees for research and
development services from Roche. This represented a 28.4% increase from revenue of $7.6 million
for the year ended December 31, 2003, primarily attributable to
revenue from our second collaboration agreement
with Roche entered into in September 2003. December 31,2004
    
    
    20032002 Roche AgreementAmortization of the upfront license payment and milestone payments
    
    $
    1,649,000
    
    
    $
    1,386,000Funding of the research collaboration
    
    
    3,500,000
    
    
    
    5,149,0002003 Roche AgreementAmortization of the upfront payment and quarterly research
payments
    
    
    4,631,000
    
    
    
    1,083,000$
    9,780,000
    
    
    $
    7,618,000
 Research and development expense Research and development expense increased by $4.4 million, or 19.2%, to $27.0 million for the year
ended December 31, 2004 from $22.6 million for the year ended December 31, 2003. Of this increase,
$3.0 million was attributable to fees related to our increased use of consulting and outside
service providers in connection with our preclinical and clinical activities, and $1.4 million was
attributable to an increase in occupancy costs associated with our expanded facility. 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 $5.8 million and $4.7 million for the year ended
December 31, 2004 and 2003, respectively. Indirect costs principally represent facility and
information technology costs. General and administrative expense General and administrative expense increased by $300,000, or 4%, to $7.4 million for the year ended
December 31, 2004 from $7.1 million for the year ended December 31, 2003. The increase was
primarily the result of $460,000 in higher personnel and personnel-related costs as we hired
personnel appropriate for a public company, an increase of $450,000 for insurance premiums, an
increase in occupancy costs of $219,000 related to our expanded facility, $229,000 in legal fees
relating to the maintenance and expansion of our 39




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intellectual property portfolio, and $179,000 of cost associated with our 401(k) matching benefit
to employees that began in 2004. These increases were offset by a decrease in non-cash
compensation expense of $1.2 million related to the grant of stock options to consultants and
employees in 2003. More stock options were granted at current market prices in 2004 relative to
options granted in 2003. Therefore, we recognized less non-cash compensation expense in 2004.
During 2005 and thereafter, we expect that general and administrative expenses will trend higher
due to expenses associated with being a public company. Interest income and interest expense Interest income increased by $215,000, or 47.7%, to $665,000 for the year ended December 31, 2004,
compared to 2003. Interest expense decreased by $31,000, or 6.87%, to $422,000 for the year ended
December 31, 2004, compared to 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
in 2004 of two equipment notes. Income taxes For the year ended December 31, 2004, we recognized a tax benefit of $258,000, which represented
the sale of $3.6 million of net operating loss carryforwards and was offset by $9,000 in state
taxes and other adjustments. Our 2003 tax benefit of $186,000 represented proceeds of $209,000
received during 2003 for the sale of $4.7 million of net operating loss carryforwards, and was
partially offset by a $23,000 provision for minimum taxes for New Jersey. Preferred stock dividends and accretion Preferred stock dividends and accretion decreased by $5.5 million, or 73%, to $2.0 million for the
year ended December 31, 2004 from $7.5 million for the year ended December 31, 2003. This decrease
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. YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002 Revenue Revenue for the year ended December 31, 2003 was $7.6 million, representing the currently
recognizable portion of upfront license fees and a milestone payment received from Roche under the
collaboration agreements of $1.4 million and $247,000, respectively. In addition, revenue includes
service fees of $5.9 million for research and development received from Roche under the
collaborations. During the year ended December 31, 2002, $1.2 million of revenue was recognized.
This was comprised of upfront license fees of $308,000 and service fees of $875,000. Our service fees increased in
2003 due to additional payments received from Roche under the 2003
Roche Agreement. Because the 2002 Roche Agreement was not effective until September 2002, we received only one quarterly payment for
research services in 2002. In 2003, we received a total of $5.9 million in service fees comprised
of the following:  
    $3.5 million from a full year of fixed quarterly payments for research services under
our 2002 Roche Agreement;
    $750,000 from one fixed quarterly payment for research and development services under
our 2003 Roche Agreement, which was not effective until September of that year;
and
    $1.6 million from payments for external research and development services under our 2002
Roche Agreement. Research and development expense Research and development expense increased by $675,000, or 3%, to $22.7 million for the year ended
December 31, 2003 from $22.0 million for the year ended December 31, 2002. Of this increase,
$1.2 million was attributable to higher personnel
and personnel-related costs as we increased headcount to support our discovery and development
programs, $789,000 to a stock-based compensation charge, $757,000 due to increased purchases of lab-related material and supplies, and $326,000
due to an increase in depreciation and amortization cost. These increases were partially offset by
a $1.7 million decrease in consulting and outside research fees and $750,000 for milestone
payments. 40




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##### Table of Contents



General and administrative expense General and administrative expense increased by $2.6 million, or 58%, to $7.1 million for the year
ended December 31, 2003 from $4.5 million for the year ended December 31, 2002. The increase was
comprised of a $2.1 million stock-based compensation charge and increases in both consulting fees
of $240,000 and legal fees of $256,000. Other income Other income during the year ended December 31, 2003 consisted of a $150,000 payment received for
an insurance settlement. We recorded no other income during the year ended December 31, 2002. Interest income and interest expense Interest income decreased by $76,000, or 14%, to $450,000 for the year ended December 31, 2003 from
$526,000 for the year ended December 31, 2002. The decrease in interest income was attributable to
lower interest rates. Interest expense increased by $42,000, or 10%, to $453,000 for the year ended
December 31, 2003 from $411,000 for the year ended December 31, 2002. The increase in interest
expense was attributable to increased borrowings under our equipment notes. Income taxes For the year ended December 31, 2003, we paid $23,000 in state income taxes. This was offset by
proceeds of $209,000 that were received from the sale of state net operating loss carryforwards. We paid
state income taxes during the year ended December 31, 2002 of $21,000. Preferred stock dividends and accretion Preferred stock dividends and accretion increased by $1.6 million, or 27%, during the year ended
December 31, 2003 from $5.9 million to $7.5 million. This is due to the Series D preferred stock
being outstanding for the entire period during the year ended December 31, 2003, the issuance of
Series Roche preferred stock in September 2003, and the recognition of a beneficial conversion
feature of $584,000 in connection with the issuance of Series Roche preferred stock. YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 Revenue Revenue for the year ended December 31, 2002 was $1.2 million, representing the currently
recognizable portion of an upfront license fee of $308,000 and fees of $875,000 for research and
development services received under the 2002 Roche Agreement. We did not record
any revenues during the year ended December 31, 2001. Research and development expense Research and development
expense increased by $11.2 million, or 105%, to $22.0 million for the year
ended December 31, 2002 from $10.7 million for the year ended December 31, 2001. Of this increase,
$5.3 million was attributable to higher external preclinical study costs consisting of $4.1 million
related to preclinical work and the initiation of the Phase I trial of MEM 1003 and $1.2 million
related to preclinical work performed on MEM 1414 and MEM 3454. The increase in research and
development expense was also attributable to an increase of $1.5 million related to higher
personnel and personnel-related costs as we increased headcount to support our discovery and
development programs, $1.5 million represented increased fees
paid to consultants and contract research organizations
and $706,000 related to increased purchases of lab-related material and supplies. Additional
increases included $896,000 representing an upfront license fee and a milestone payment under an
in-licensing agreement and $677,000 in facility-related charges. General and administrative expense General and administrative
expense increased by $1.1 million, or 31.2%, to $4.5 million for the year
ended December 31, 2002 from $3.4 million for the year ended December 31, 2001. Of this increase,
$771,000 was due to higher personnel and personnel-related costs as we continued to build our
infrastructure to support our corporate growth, $127,000 was attributable to travel cost, and
$153,000 was due to increased corporate insurance and legal fees. Interest income and interest expense Interest income decreased by $96,000, or 15.4%, to $526,000 for the year ended December 31, 2002
from $622,000 for the year ended December 31, 2001. The decrease in interest income was primarily
attributable to lower interest rates. Interest expense increased by 41




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##### Table of Contents



$65,000 to $411,000 for the year ended December 31, 2002 from $346,000 for the year ended December
31, 2001. The increase in interest expense was attributable to increased borrowings under our
equipment notes. Income taxes For the year ended December 31, 2002, we paid $21,000 in state income taxes. We did not pay any
income taxes during the year ended December 31, 2001. Preferred stock dividends and accretion Preferred stock dividends and accretion increased by $2.9 million during the year ended December
31, 2002. This is due to the Series D preferred stock not being outstanding during the year ended
December 31, 2001 and the recognition of a deemed dividend of $169,000 on Series C preferred stock
in connection with the issuance of Series D preferred stock. 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 December 31, 2004, we have raised net proceeds of $123.9 million
from the sale of equity securities. In addition, as of December 31, 2004, we have received $22.0
million in upfront and milestone payments, $11.6 million in collaboration agreement fees, $9.6
million from equipment financings, $1.7 million from research reimbursement cost and $3.6 million
in interest income. To date, inflation has not had a material effect on our business. At December 31, 2004, cash, cash equivalents and marketable securities were $41.1 million as
compared to $30.1 million 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 $21.0 million for the year ended December 31, 2004. This
primarily reflects a net loss of $24.1 million, as well as the recognition of $2.4 million of
deferred revenues from our two Roche collaborations, offset by working capital sources of $2.3
million, non-cash charges for depreciation expense of $2.1 million and non-cash compensation
expense of $1.1 million. Net cash used in investing activities for the year ended December 31,
2004 was $39,000, which represents a decrease in our net investment in marketable securities,
offset by funds used for our facility expansion and to purchase additional equipment. Net cash
provided by financing activities during the year ended December 31, 2004 was $35.4 million, which
consisted primarily of $35.3 million of net proceeds from our initial public offering in the second
quarter, $269,000 from the exercise of stock options and the conversion of certain warrants, $2.0
million generated from borrowings under equipment notes, and was offset by $2.2 million used in
repayment of equipment notes. The following table summarizes as of December 31, 2004, our contractual obligations for equipment
notes, operating lease payments in connection with the lease of our current facility, and contract
research organization obligations. This table should be read in conjunction with the notes
accompanying our financial statements. Payments due in(in thousands)Contractual obligations
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010-2014
    
    
    TotalOperating lease payments
    
    $
    1,884
    
    
    $
    1,917
    
    
    $
    1,951
    
    
    $
    1,985
    
    
    $
    2,020
    
    
    $
    10,269
    
    
    $
    20,026Equipment notes payable
    
    
    1,806
    
    
    
    1,120
    
    
    
    539
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    3,520Contract research organization obligations
    
    
    4,458
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,458Bayer milestone payment
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000Total
    
    $
    9,148
    
    
    $
    3,037
    
    
    $
    2,490
    
    
    $
    2,040
    
    
    $
    2,020
    
    
    $
    10,269
    
    
    $
    29,004
 42




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The contract research organization obligations in the above table represent firm commitments to
utilize the services of certain service providers in conjunction with independently monitoring our
clinical trials, acquiring and evaluating data in connection with our clinical trials, and to
continue the clinical development of MEM 1003 and MEM 3454 in 2005. We expect to
incur increased contract research organization costs as we increase the number of drug candidates and
indications for which we conduct preclinical tests and clinical trials beyond 2005. However, as of
December 31, 2004, we did not have any contractual obligations beyond December 31, 2005. In
addition, the nature of the work being conducted under our agreements with contract research
organizations is such that work may be stopped with very short notice. In such event, we will not
be liable for the full amount of the contract. Our contractual obligations may vary depending upon
the results of underlying studies, the completion of preclinical work and/or clinical trials and
certain other variables that may yield a result that differs from our estimate. In connection with our in-license agreement with Bayer for MEM 1003, we are required to make
payments up to $19.0 million upon our achievement of future milestones (including a $1.0 million
milestone payment due upon the commencement of Phase IIa clinical trials, which are currently
scheduled to commence by the end of the first half of 2005) and to pay royalties upon sales of any
products incorporating the licensed compound. The other amounts due to Bayer have not been
included in the above table as a result of the uncertainty of when, if ever, other milestones will be
achieved. 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 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 the end of the first quarter of 2006. 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;Ø
    the success of our collaborations with Roche;Ø
    whether we are able to enter into a collaboration with regard
to MEM 1003 or our PDE10A inhibitor program 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 costs involved in utilizing third party contract research
organizations for preclinical studies and clinical trials;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. 43




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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 US 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 value of our equity securities. 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 with Roche 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 made 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 effort and, to the extent such
estimates change, the impact of such change is recorded at that time. We are applying the provisions of the Emerging Issues Task Force (EITF) No. 00-21, beginning April
1, 2004 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 effort 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
    preclinical and clinical contract research organization 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 44




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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 US 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 contract research organizations. In addition, research and
development expenses include the cost of manufacturing clinical trial drug supply shipped to our
clinical trial sites, 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 Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, in accounting for our stock-based employee
compensation plans, rather than the alternative fair value accounting method provided for under
SFAS No. 123, Accounting for Stock-Based Compensation.In the notes to our financial statements, we
provide pro forma disclosures in accordance with SFAS No. 123, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation, Transition and Disclosure, and related pronouncements. We account for stock options and warrants granted to non-employees based on the fair value of the
stock option or warrant 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. In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123 (revised 2004)
statement, Share-Based Payment, (SFAS 123R), which addresses the accounting for share-based awards
to employees, including those made under employee stock purchase plans. SFAS 123R requires
companies to recognize the fair value of stock options and other stock-based compensation to
employees in their statements of operations. The effective date of SFAS 123R for us is July 1,
2005. Because we currently account for our stock-based compensation plans in accordance with APB
Opinion No. 25, the adoption of SFAS 123R will have a material effect on our financial statements
beginning in the third quarter of 2005. 
 Item 7A. 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 US 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 December 31, 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, 2004. 45




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Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of KPMG LLP, Independent Registered Public Accounting Firm
    
    
    47Balance Sheets as of December 31, 2004 and 2003
    
    
    48Statements of Operations for the years ended December 31, 2004, 2003 and 2002
    
    
    49Statements of Changes in Stockholders Equity / (Deficit) for the years ended December 31, 2004, 2003 and 2002
    
    
    50Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
    
    
    51Notes to Financial Statements
    
    
    52
 46




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Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Memory Pharmaceuticals Corp.: We have audited the accompanying balance sheets of Memory Pharmaceuticals Corp. as of December 31,
2004 and 2003, and the related statements of operations, stockholders equity/(deficit), and cash
flows for each of the years in the three-year period ended December 31, 2004. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Memory Pharmaceuticals Corp. as of December 31, 2004 and 2003,
and the results of its operations and its cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP New York, NY
March 30, 2005 47




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MEMORY PHARMACEUTICALS CORP. 
 BALANCE SHEETS
 (in thousands, except for share and per share amounts)
 December 31,
    
    
    December 31,2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    31,220
    
    
    $
    16,884Marketable securities
    
    
    9,876
    
    
    
    13,223Receivables
    
    
    875
    
    
    
    2,019Prepaid and other current assets
    
    
    538
    
    
    
    1,664Total current assets
    
    
    42,509
    
    
    
    33,790Property and equipment, net
    
    
    10,376
    
    
    
    9,085Restricted cash
    
    
    505
    
    
    
    505Other assets
    
    
    7
    
    
    
    54Total assets
    
    $
    53,397
    
    
    $
    43,434LIABILITIES AND STOCKHOLDERS EQUITY / (DEFICIT)Current liabilities:Accounts payable
    
    $
    1,691
    
    
    $
    1,754Accrued expenses
    
    
    3,177
    
    
    
    3,103Current portion of equipment notes payable
    
    
    1,806
    
    
    
    1,675Deferred revenue  current
    
    
    7,095
    
    
    
    6,220Total current liabilities
    
    
    13,769
    
    
    
    12,752Equipment notes payable, less current portion
    
    
    1,714
    
    
    
    2,112Deferred revenue  long-term
    
    
    10,472
    
    
    
    13,752Total liabilities
    
    
    25,955
    
    
    
    28,616Redeemable convertible preferred stock, Series A, B, C, D and Roche; $0.001 par value per share;
no shares authorized, issued or outstanding at December 31, 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
    
    
    
    
    
    
    104,275Commitments and contingencies (Note 15)Stockholders equity / (deficit):Common stock, $0.001 par value per share; 100,000,000 shares authorized and 20,547,442 issued
and outstanding at December 31, 2004, and 17,758,666 shares authorized and 1,138,203 issued
and outstanding at December 31, 2003;
    
    
    21
    
    
    
    1Additional paid-in capital
    
    
    148,182
    
    
    
    5,410Accumulated deficit
    
    
    (120,434
    )
    
    
    (94,316
    )Accumulated other comprehensive loss
    
    
    (45
    )
    
    
    Deferred compensation
    
    
    (282
    )
    
    
    (552
    )Total stockholders equity / (deficit)
    
    
    27,442
    
    
    
    (89,457
    )Total liabilities and stockholders equity / (deficit)
    
    $
    53,397
    
    
    $
    43,434
 See accompanying notes to financial statements. 48




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MEMORY PHARMACEUTICALS CORP. 
 STATEMENTS OF OPERATIONS
 (in thousands, except for share and per share amounts)
 Years Ended December 31,2004
    
    
    2003
    
    
    2002Revenue
    
    $
    9,780
    
    
    $
    7,618
    
    
    $
    1,183Operating expenses:Research and development
    
    
    26,975
    
    
    
    22,626
    
    
    
    21,951General and administrative
    
    
    7,393
    
    
    
    7,111
    
    
    
    4,489Total operating expenses
    

    
    34,368
    
    
    
    29,737
    
    
    
    26,440Loss from operations
    
    
    (24,588
    )
    
    
    (22,119
    )
    
    
    (25,257
    )Other Income
    
    
    
    
    
    
    150
    
    
    
    Interest:Income
    
    
    665
    
    
    
    450
    
    
    
    526Expense
    
    
    (422
    )
    
    
    (453
    )
    
    
    (411
    )Interest income (expense), net
    
    
    243
    
    
    
    (3
    )
    
    
    115Net loss before income taxes
    
    
    (24,345
    )
    
    
    (21,972
    )
    
    
    (25,142
    )Income taxes
    
    
    (249
    )
    
    
    (186
    )
    
    
    21Net loss
    
    
    (24,096
    )
    
    
    (21,786
    )
    
    
    (25,163
    )Less redeemable convertible preferred stock dividends,
accretion, and beneficial conversion feature
    
    
    2,022
    
    
    
    7,493
    
    
    
    5,889Net loss attributable to common stockholders
    
    $
    (26,118
    )
    
    $
    (29,279
    )
    
    $
    (31,052
    )Basic and diluted net loss per share of common stock
    
    $
    (1.67
    )
    
    $
    (30.07
    )
    
    $
    (48.10
    )Basic and diluted weighted average number of shares
of common stock outstanding
    
    
    15,605,985
    
    
    
    973,637
    
    
    
    645,615
 See accompanying notes to financial statements. 49




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##### Table of Contents



MEMORY PHARMACEUTICALS CORP. 
 STATEMENTS OF STOCKHOLDERS EQUITY / (DEFICIT)
 (in thousands, except for share amounts)
 AccumulatedCommon stock
    
    
    Additional
    
    
    
    
    
    
    otherpaid in
    
    
    Accumulated
    
    
    comprehensive
    
    
    DeferredShares
    
    
    Amount
    
    
    capital
    
    
    deficit
    
    
    loss
    
    
    compensation
    
    
    TotalBalance at December 31, 2001
    
    
    590,021
    
    
    $
    1
    
    
    $
    62
    
    
    $
    (33,985
    )
    
    $
    
    
    
    $
    
    
    
    $
    (33,922
    )Compensation expense in connection with issuance of stock
options to non-employees
    
    
    
    
    
    
    
    
    
    
    161
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    161Issuance of shares of common stock upon exercise of stock options
    
    
    140,797
    
    
    
    
    
    
    
    88
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88Accrued dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,414
    )
    
    
    
    
    
    
    
    
    
    
    (5,414
    )Accretion of preferred stock to liquidation value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (306
    )
    
    
    
    
    
    
    
    
    
    
    (306
    )Deemed dividend on Series C preferred stock
    
    
    
    
    
    
    
    
    
    
    169
    
    
    
    (169
    )
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,163
    )
    
    
    
    
    
    
    
    
    
    
    (25,163
    )Balance at December 31, 2002
    
    
    730,818
    
    
    
    1
    
    
    
    480
    
    
    
    (65,037
    )
    
    
    
    
    
    
    
    
    
    
    (64,556
    )Fair value of Roche warrants
    
    
    
    
    
    
    
    
    
    
    584
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    584Beneficial conversion feature on Series Roche preferred stock
    
    
    
    
    
    
    
    
    
    
    584
    
    
    
    (584
    )
    
    
    
    
    
    
    
    
    
    
    Employee stock awards
    
    
    15,000
    
    
    
    
    
    
    
    97
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97Deferred compensation awards to employees
    
    
    
    
    
    
    
    
    
    
    2,197
    
    
    
    
    
    
    
    
    
    
    
    (2,197
    )
    
    
    Amortization of deferred compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,645
    
    
    
    1,645Compensation expense in connection with issuance of stock
options and warrants to non-employees
    
    
    
    
    
    
    
    
    
    
    1,208
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,208Issuance of shares of common stock upon exercise of stock options
    
    
    392,385
    
    
    
    
    
    
    
    260
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    260Accrued dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,457
    )
    
    
    
    
    
    
    
    
    
    
    (6,457
    )Accretion of preferred stock to liquidation value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (452
    )
    
    
    
    
    
    
    
    
    
    
    (452
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,786
    )
    
    
    
    
    
    
    
    
    
    
    (21,786
    )Balance at December 31, 2003
    
    
    1,138,203
    
    
    
    1
    
    
    
    5,410
    
    
    
    (94,316
    )
    
    
    
    
    
    
    (552
    )
    
    
    (89,457
    )Issuance of compensatory stock options, net of forfeitures
    
    
    
    
    
    
    
    
    
    
    836
    
    
    
    
    
    
    
    
    
    
    
    (836
    )
    
    
    Amortization of deferred compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,106
    
    
    
    1,106Issuance of shares of common stock upon exercise of stock
options and conversion of certain warrants
    
    
    355,993
    
    
    
    1
    
    
    
    268
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    269Issuance of shares of common stock under the employee stock
purchase plan
    
    
    7,819
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46Issuance of shares of common stock with initial public offering
    
    
    5,750,000
    
    
    
    6
    
    
    
    35,338
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,344Conversion of preferred stock to common stock in conjunction
with the initial public offering
    
    
    13,295,427
    
    
    
    13
    
    
    
    106,285
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106,298Accrued dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,862
    )
    
    
    
    
    
    
    
    
    
    
    (1,862
    )Accretion of preferred stock to liquidation value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (160
    )
    
    
    
    
    
    
    
    
    
    
    (160
    )Unrealized loss on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    (45
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,096
    )
    
    
    
    
    
    
    
    
    
    
    (24,096
    )Balance at December 31, 2004
    
    
    20,547,442
    
    
    $
    21
    
    
    $
    148,182
    
    
    $
    (120,434
    )
    
    $
    (45
    )
    
    $
    (282
    )
    
    $
    27,442
 See accompanying notes to financial statements. 50




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##### Table of Contents



MEMORY PHARMACEUTICALS CORP. 
 STATEMENTS OF CASH FLOWS
 (in thousands)
 Years Ended December 31,2004
    
    
    2003
    
    
    2002Cash flows used in operating activities:Net loss
    
    $
    (24,096
    )
    
    $
    (21,786
    )
    
    $
    (25,163
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    2,050
    
    
    
    1,803
    
    
    
    1,471Non-cash stock based compensation
    
    
    1,106
    
    
    
    2,950
    
    
    
    161Changes in operating accounts:Receivables
    
    
    1,144
    
    
    
    (2,019
    )
    
    
    45Prepaid and other current assets
    
    
    1,126
    
    
    
    (929
    )
    
    
    (144
    )Other assets
    
    
    47
    
    
    
    193
    
    
    
    (179
    )Accounts payable
    
    
    (63
    )
    
    
    (606
    )
    
    
    236Accrued expenses
    
    
    74
    
    
    
    738
    
    
    
    1,266Deferred revenue
    
    
    (2,405
    )
    
    
    12,280
    
    
    
    7,692Net cash used in operating activities
    
    
    (21,017
    )
    
    
    (7,376
    )
    
    
    (14,615
    )Cash flows used in investing activities:Purchases of marketable securities
    
    
    (10,546
    )
    
    
    (7,993
    )
    
    
    (16,880
    )Sales of marketable securities
    
    
    13,848
    
    
    
    10,181
    
    
    
    1,469Additions to property and equipment
    
    
    (3,341
    )
    
    
    (2,092
    )
    
    
    (4,164
    )Change in restricted cash
    
    
    
    
    
    
    40
    
    
    
    (77
    )Net cash provided by / (used in) investing activities
    
    
    (39
    )
    
    
    136
    
    
    
    (19,652
    )Cash flows provided by financing activities:Proceeds from issuance of common stock
    
    
    35,659
    
    
    
    260
    
    
    
    88Proceeds from issuance of redeemable convertible preferred stock
    
    
    
    
    
    
    10,000
    
    
    
    39,779Proceeds from equipment notes payable
    
    
    1,963
    
    
    
    1,543
    
    
    
    2,318Principal repayment equipment notes payable
    
    
    (2,230
    )
    
    
    (1,742
    )
    
    
    (1,137
    )Net cash provided by financing activities
    
    
    35,392
    
    
    
    10,061
    
    
    
    41,048Net increase in cash and cash equivalents
    
    
    14,336
    
    
    
    2,821
    
    
    
    6,781Cash and cash equivalents, beginning of period
    
    
    16,884
    
    
    
    14,063
    
    
    
    7,282Cash and cash equivalents, end of period
    
    $
    31,220
    
    
    $
    16,884
    
    
    $
    14,063Supplemental cash flow information:Cash paid for interest
    
    $
    422
    
    
    $
    453
    
    
    $
    411Cash paid for taxes
    
    
    12
    
    
    
    20
    
    
    
    15Accrued dividends on redeemable convertible preferred stock
    
    
    1,862
    
    
    
    6,457
    
    
    
    5,414Accretion of redeemable convertible preferred stock to liquidation value
    
    
    160
    
    
    
    452
    
    
    
    306Beneficial conversion feature on Series Roche preferred stock
    
    
    
    
    
    
    584
    
    
    
    Deemed dividend on Series C preferred stock
    
    
    
    
    
    
    
    
    
    
    169
 See accompanying notes to financial statements. 51




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##### Table of Contents



MEMORY PHARMACEUTICALS CORP. 
 NOTES TO FINANCIAL STATEMENTS
  1)
    ORGANIZATION AND BUSINESS OVERVIEWMemory Pharmaceuticals Corp. was incorporated on March 19, 1997 under the laws of the State of
Delaware and commenced operations on January 1, 1998. Except as expressly indicated or unless
the context otherwise requires, as used herein, the Company, we, us, our, or similar
terms means Memory Pharmaceuticals Corp.We are a biopharmaceutical company focused on the 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. These conditions include neurological diseases associated with
aging, such as Alzheimers disease, vascular dementia and MCI and also include certain
psychiatric disorders such as schizophrenia and depression.We have an accumulated deficit of $120.4 million at December 31, 2004. We intend to continue
research toward the development of commercial products in order to generate future revenue from
upfront license fees, royalties, sales, and research and development support. We financed our
initial operations through the sale of redeemable convertible preferred stock and subsequent to
that we sold common stock as part of an initial public offering on April 5, 2004. Refer to Note
7, Initial Public Offering of Common Stock, and Note 8, Redeemable Convertible Preferred
Stock, for further details.We face certain risks and uncertainties, which are present in many emerging biopharmaceutical
companies. Our proposed technology platform is considered novel and has not yet been shown to be
successful in the treatment of CNS disorders. We have not completed development of any drugs and
we do not expect that any drugs resulting from our research and development efforts will be
commercially available for a significant number of years, if at all. We will continue to seek
collaborative partners to fund a substantial portion of our research operations over the next
several years. In addition, we face risks and uncertainties regarding future profitability,
ability to obtain future capital, protection of patents and property rights, competition, rapid
technological change, government regulations including the need for product approvals, changing
health care marketplace, recruiting and retaining key personnel, and contract research
organizations.2)
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates  The preparation of the financial statements requires us to make a number of estimates and
assumptions relating to the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the period. Significant items subject to such estimates
and assumptions include the fair value of our equity securities, carrying amount of property,
plant and equipment, valuation allowances for deferred income tax assets, obligations related to
employee benefits, the estimated development period for revenue recognition under research and
collaboration arrangements and estimated liabilities for services provided by contract research
organizations. Actual results could differ from those estimates. Revenue Recognition  We recognize revenue relating to our collaborative arrangements in accordance with the SECs
Staff Accounting Bulletin No. 104, or SAB 104, Revenue Recognition. Revenue under the
collaborative arrangements may include the receipt of non-refundable upfront license fees,
milestone payments, and research and development payments. We evaluate these agreements to
determine units of accounting for revenue recognition purposes. When we have continuing
performance obligations under the terms of the arrangements, non-refundable upfront license fees
and performance milestone payments are recognized as revenue rateably over the period in which
we expect to obtain FDA approval. We periodically review the estimated development period and,
to the extent such estimates change, the impact of such change is recorded at that time.
Deferred revenue consists of payments received in advance of revenue recognition under these
agreements. Payments received for research and development efforts performed by us are
generally recognized as services are performed. 52




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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, referred to in Note 10 License Agreements and Collaborations, 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, in 2004.
Since Roche has the right to enter into a license under the 2003 Roche 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 preclinical and clinical
development through Phase IIa of nicotinic alpha-7 partial agonist compounds. This period also
reflects the overall time during which Roche has the right to obtain an exclusive, sublicensable
license to our patent rights and know-how for any nicotinic alpha-7 partial agonist we develop.
We 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. Concentrations of Credit Risk  Financial instruments that subject us to credit risks are cash, cash equivalents, and marketable
securities. We invest our cash in money market funds and highly rated commercial paper. Our
cash equivalents consist primarily of money market funds and other debt investments. Our
marketable securities are debt securities primarily consisting of government obligations,
mortgage-backed securities, and corporate debt securities.All of our revenue recognized during 2004, 2003 and 2002 was pursuant to our 2002 Roche
Agreement and our 2003 Roche Agreement (refer to Note 10  License Agreements and
Collaborations.) Cash and Cash Equivalents  We consider all highly liquid investments with maturities of three months or less at the time of
purchase to be cash equivalents. Cash equivalents consist primarily of money market funds and
other debt investments that are carried at cost, which approximates fair value. Marketable Securities  Our 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. 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 $13.2 million, with original maturity dates exceeding 90 days at December
31, 2003, were reclassified to marketable securities on our balance sheet. Property and Equipment  We record property and equipment at cost. Leasehold improvements represent capital improvements
made to our leased property. We record leasehold improvement amortization using the
straight-line method over the shorter of the estimated useful life of the asset or the term of
our lease. Laboratory and computer equipment, furniture and fixtures are stated at cost and are
depreciated on a straight-line basis over the estimated useful life of the respective asset,
which is approximately three to seven years. Leasehold improvements are stated at cost and are
amortized on a straight-line basis over the term of the facility lease agreement, which
approximates ten years (see Note 15, Commitments and Contingencies.) Research and Development  All research and development costs are charged to operations as incurred. Research and
development costs include an allocation of indirect costs of $5.8 million, $4.7 million, and
$4.3 million for the years ended December 31, 2004, 2003, and 2002, respectively. Indirect
costs principally represent facility and information technology costs. These costs are
allocated to research and development based on the approximate usage of our facility and
information technology by our research and development department. Restricted Cash  Restricted cash represent deposits of $505,000 as of December 31, 2004 and 2003, respectively,
and are required as security for the performance of our obligations under a facility equipment
financing agreement. Under this agreement, we have provided the security deposits in the form
of a letter of credit, which is collateralized by interest-bearing certificates of deposits. Income Taxes  Deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the amounts of existing assets and liabilities carried on
the financial statements and their respective tax bases and the benefits 53




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arising from the realization of operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount expected to be realized. Stock-based Compensation  We 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.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, 2003 and 2002 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. Year Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands, except for per share amounts)Net loss attributable to common stockholders, as reported
    
    $
    (26,118
    )
    
    $
    (29,279
    )
    
    $
    (31,052
    )Add: Stock-based employee compensation expense included in
reported net loss
    
    
    482
    
    
    
    1,705
    
    
    
    161Deduct: Employee stock-based compensation expense under
fair-value based method
    
    
    (1,329
    )
    
    
    (1,873
    )
    
    
    (183
    )Deduct: Employee compensation for 2004 Employee Stock Purchase
Plan under fair-value based method
    
    
    (97
    )
    
    
    
    
    
    
    Pro forma net loss attributable to common stockholders
    
    $
    (27,062
    )
    
    $
    (29,447
    )
    
    $
    (31,074
    )Pro forma basic and diluted net loss per share of common stock
    
    $
    (1.73
    )
    
    $
    (30.24
    )
    
    $
    (48.13
    )
  The fair values of these option grants were calculated using weighted averages of assumptions
for the multiple stock options granted during the years ended December 31, 2004, 2003, and 2002. December 31,2004
    
    
    2003
    
    
    2002Expected stock price volatility
    
    
    62
    %
    
    
    60
    %
    
    
    60
    %Expected term until exercise
    
    5 years
    
    5 years
    
    5 yearsRisk-free interest rate
    
    
    3.56
    %
    
    
    3.11
    %
    
    
    3.8
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
  The per share weighted average fair value of stock options granted during 2004, 2003 and 2002
was determined using the Black-Scholes option-pricing model. These assumptions resulted in
weighted average fair values of $5.33, $3.91, and $0.14 per share for stock options granted in
2004, 2003, and 2002, respectively.In December 2004, the FASB issued SFAS 123R, Share-Based Payment, (SFAS 123R), which addresses
the accounting for share-based awards to employees, including those made under employee stock
purchase plans. SFAS 123R requires companies to recognize the fair value of stock options and
other stock-based compensation to employees in their statements 54




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of operations. The effective date of SFAS 123R for us is July 1, 2005. Because we currently
account for our stock-based compensation plans in accordance with APB Opinion No. 25, the
adoption of SFAS 123R will have a material effect on our financial statements beginning in the
third quarter of 2005. Net Loss Per Share  Basic 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, because the effect of including potential common stock equivalents would be
anti-dilutive. Therefore, diluted weighted average shares outstanding exclude shares underlying
the redeemable convertible preferred stock, stock options and warrants. These potential common
stock equivalents are summarized as follows: Year Ended December 31,2004
    
    
    2003
    
    
    2002Common stock options
    
    
    2,989,538
    
    
    
    2,395,613
    
    
    
    2,613,719Warrants
    
    
    119,907
    
    
    
    162,293
    
    
    
    51,450Redeemable convertible preferred stock
    
    
    
    
    
    
    13,295,427
    
    
    
    12,369,501Total
    
    
    3,109,445
    
    
    
    15,853,333
    
    
    
    15,034,670
  Refer to Note 8, Redeemable Convertible Preferred Stock, for the details of the conversion of
the redeemable convertible preferred stock during 2004. Pro Forma Net Loss per Share (UNAUDITED)  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 years ending December 31, 2004, 2003, and
2002. 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: Year Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands, except for share and per share amounts)Basic and diluted:Net loss
    
    $
    (24,096
    )
    
    $
    (21,786
    )
    
    $
    (25,163
    )Preferred stock dividends, accretion to
redemption value and beneficial conversion
feature
    
    
    (2,022
    )
    
    
    (7,493
    )
    
    
    (5,889
    )Net loss attributable to common stockholders
    
    
    (26,118
    )
    
    
    (29,279
    )
    
    
    (31,052
    )Basic and diluted weighted average number of
shares of common stock outstanding
    
    
    15,605,985
    
    
    
    973,637
    
    
    
    645,615Basic and diluted net loss per share
    
    $
    (1.67
    )
    
    $
    (30.07
    )
    
    $
    (48.10
    )Pro forma basic and diluted:Net loss
    
    
    (24,096
    )
    
    
    (21,786
    )
    
    
    (25,163
    )Basic and diluted weighted average number of
shares of common stock outstanding
    
    
    15,605,985
    
    
    
    973,637
    
    
    
    645,615Weighted 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
    
    
    3,324,241
    
    
    
    12,652,464
    
    
    
    10,761,993Pro forma basic and diluted weighted average
shares of common stock outstanding
    
    
    18,930,226
    
    
    
    13,626,101
    
    
    
    11,407,608Pro forma basic and diluted net loss per share
    
    $
    (1.27
    )
    
    $
    (1.64
    )
    
    $
    (2.21
    )
 55




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Comprehensive Loss  Comprehensive loss is calculated in accordance with SFAS No. 130, Reporting Comprehensive
Income and includes our 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 year ended December 31, 2004, comprehensive loss was
$24.1 million, which includes our net loss of $24.1 million, and an unrealized loss on
available-for-sale marketable securities of $45,000. For the years ended December 31, 2003 and
2002, comprehensive loss was the same as our reported net loss. Reclassification  A 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 10  License Agreements and Collaborations, previously classified as long-term
to current deferred revenue on our balance sheet.3)
    MARKETABLE SECURITIES  The following is a summary of our available-for-sale investments in debt securities that we
include in current assets on our balance sheet at fair value: December 31,2004
    
    
    2003Fair Value
    
    
    Unrealized Loss
    
    
    Fair Value(in thousands)Corporate debt securities
    
    $
    7,902
    
    
    $
    43
    
    
    $
    7,194Obligations of US government agencies
    
    
    1,302
    
    
    
    2
    
    
    
    3,372Mortgage-backed and asset-backed securities
    
    
    672
    
    
    
    
    
    
    
    657Certificates of deposit
    
    
    
    
    
    
    
    
    
    
    2,000$
    9,876
    
    
    $
    45
    
    
    $
    13,223
  The fair value of available-for-sale marketable securities approximated cost at December 31,
2003.The amortized cost and fair value of our available-for-sale investments in debt securities by
stated maturity at December 31, 2004 is as follows: Cost
    
    
    Fair value(in thousands)Due in one year or less
    
    $
    7,485
    
    
    $
    7,467Due after one year, up to two years
    
    
    2,036
    
    
    
    2,009Due after two years
    
    
    400
    
    
    
    400$
    9,921
    
    
    $
    9,876
  We evaluate declines in fair value of our investments in available-for-sale marketable
securities to determine if these declines are other-than-temporary. If a decline in fair value
is determined to be other-than-temporary, an impairment charge would be recorded and a new cost
basis in the investment would be established.4)
    PROPERTY AND EQUIPMENT  Property and equipment consists of the following: December 31,2004
    
    
    2003(in thousands)Laboratory equipment
    
    $
    7,192
    
    
    $
    6,165Leasehold improvements
    
    
    7,098
    
    
    
    4,843Computer equipment
    
    
    2,137
    
    
    
    1,817Furniture, fixtures and equipment
    
    
    924
    
    
    
    653Construction in progress
    
    
    
    
    
    
    53817,351
    
    
    
    14,016Accumulated depreciation and amortization
    
    
    (6,975
    )
    
    
    (4,931
    )$
    10,376
    
    
    $
    9,085
 56




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Construction in progress at December 31, 2003 related to the expansion of laboratory space. The
cost of equipment subject to equipment loan financing was $9.6 million and $7.6 million as of
December 31, 2004 and 2003, respectively. Depreciation expense relating to such equipment was
approximately $1.4 million, $1.3 million, and $1.1 million for the years ended December 31,
2004, 2003 and 2002, respectively.Depreciation and amortization of property and equipment was $2.1 million, $1.8 million, and $1.5
million and for the years ended December 31, 2004, 2003, and 2002, respectively.5)
    ACCRUED EXPENSES  Accrued expenses consist of the following: December 31,2004
    
    
    2003(in thousands)Accrued salaries and employee benefits
    
    $
    1,194
    
    
    $
    1,498Accrued research costs
    
    
    1,048
    
    
    
    640Accrued professional costs
    
    
    44
    
    
    
    505Other
    
    
    891
    
    
    
    460$
    3,177
    
    
    $
    3,103
  6)
    STOCK-BASED COMPENSATION  STOCK OPTIONSOur 2004 Stock Incentive Plan (2004 Plan) was adopted in April 2004. The 2004 Plan allows any
remaining shares reserved for option grants under the 1998 Equity Plan plus an additional 1
million option grant shares of common stock to be issued. The 2004 Plan permits the granting of
both incentive stock options and non-qualified stock options. Options are exercisable over a
period determined by the board of directors, but not longer than ten years after the grant date.
The exercise price is the closing market price of our stock at the date of grant.Our 1998 Employee, Director, and Consultant Stock Option Plan (the 1998 Equity Plan) was adopted
in March 1998. Both incentive stock options and non-qualified stock options were granted under
the 1998 Equity Plan. Options granted under the 1998 Equity Plan are exercisable over a period
of ten years after the grant date. The Board also determined the exercise price at the time of
grant.Stock option transactions are summarized as follows: Weighted averageShares
    
    
    Exercise price per share
    
    
    exercise priceOutstanding at December 31, 2001
    
    
    1,447,231
    
    
    $
    0.30 - $0.75
    
    
    $
    0.69Granted
    
    
    1,691,803
    
    
    
    0.75  0.75
    
    
    
    0.75Exercised
    
    
    (140,795
    )
    
    
    0.30  0.75
    
    
    
    0.63Cancelled / Forfeited
    
    
    (379,604
    )
    
    
    0.30  0.75
    
    
    
    0.75Outstanding at December 31, 2002
    
    
    2,618,635
    
    
    $
    0.30 - $0.75
    
    
    $
    0.72Granted
    
    
    249,558
    
    
    
    0.75  2.70
    
    
    
    2.43Exercised
    
    
    (392,373
    )
    
    
    0.30  2.70
    
    
    
    0.66Cancelled / Forfeited
    
    
    (80,293
    )
    
    
    0.75  0.75
    
    
    
    0.75Outstanding at December 31, 2003
    
    
    2,395,527
    
    
    $
    0.30 - $2.70
    
    
    $
    0.93Granted
    
    
    1,278,368
    
    
    
    2.70 - $9.82
    

    
    
    7.95Exercised
    
    
    (352,820
    )
    
    
    0.30  2.70
    
    
    
    0.76Cancelled / Forfeited
    
    
    (331,537
    )
    
    
    0.75  9.82
    
    
    
    4.35Outstanding at December 31, 2004
    
    
    2,989,538
    
    
    $
    0.30 - $9.82
    
    
    $
    3.57
  There are 467,791 shares available for future grant under the 2004 Plan as of December 31,
2004. 57




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The following table summarizes information about stock options outstanding at December 31,
2004: OPTIONS OUTSTANDING
    
    
    OPTIONS EXERCISABLEWeighted averageremaining years of
    
    
    Weighted average
    
    
    
    
    
    
    Weighted averageRange of exercise prices
    
    Number of options
    
    
    contractual life
    
    
    exercise price
    
    
    Number of options
    
    
    exercise price$0.30 - $0.30
    
    
    8,666
    
    
    
    3.6
    
    
    $
    0.30
    
    
    
    8,666
    
    
    $
    0.30$0.54 - $0.75
    
    
    1,701,362
    
    
    
    7.0
    
    
    $
    0.75
    
    
    
    1,262,197
    
    
    $
    0.75$2.70 - $2.70
    
    
    235,227
    
    
    
    7.9
    
    
    $
    2.70
    
    
    
    231,490
    
    
    $
    2.70$5.04 - $7.56
    
    
    341,187
    
    
    
    9.5
    
    
    $
    6.86
    
    
    
    123,437
    
    
    $
    7.00$7.57 - $9.82
    
    
    703,096
    
    
    
    9.2
    
    
    $
    9.11
    
    
    
    106,953
    
    
    $
    9.45Outstanding at
December 31, 2004
    
    
    2,989,538
    
    
    
    7.9
    
    
    $
    3.57
    
    
    
    1,732,743
    
    
    $
    1.99
  Options exercisable and the weighted average exercise prices were 1,407,389 and $1.05 at
December 31, 2003 and 1,127,139 and $0.69 at December 31, 2002.Upon the closing of our initial public offering, we issued a non-employee pursuant to various
consulting and separation agreements 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 we recognized
compensation expense of $437,000 during the year ended December 31, 2004, as these options
vested immediately. The fair value of the option granted was based on the Black-Scholes
option-pricing model using the following assumptions: 60% volatility, expected dividend yield of
0%, expected life of five years and risk-free interest rate of 3.2%During 2003, we granted options to purchase 91,727 shares of common stock at an exercise price
of $2.70 per share pursuant to the 1998 Equity Plan to a non-employee pursuant to various
consulting and separation agreements. Compensation expense of $1.1 million attributable to the
fair value of the options was recognized as the options vested immediately. The fair value of
options granted was based on the Black-Scholes option-pricing model using the following
assumptions: 60% volatility, expected dividend yield of 0%, and expected life of five years and
risk-free interest rate of 2.9%.During 2002, we granted options to purchase 411,861 shares of common stock at an exercise price
of $0.75 per share pursuant to the 1998 Equity Plan to non-employees and a former employee
during 2002 for various consulting or separation agreements. We recognized $161,000 of
compensation expense during 2002 based on the Black-Scholes option-pricing model using the
following assumptions: 60% volatility, expected dividend yield of 0%, an expected life of five
years and risk-free interest rate of 3.8%.STOCK AWARDSThe Company issued stock awards of 15,000 shares during 2003. We recognized $97,000 of
compensation expense during 2003 as such awards vested immediately.FORFEITURE OF CERTAIN STOCK OPTIONSIn January 2004, we 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 Equity Plan. Deferred compensation
expense of $1.1 million attributable to the intrinsic value of the options granted was measured
at the measurement date for the grant. Compensation expense was being recognized rateably over
the four-year vesting period. We had recognized $212,000 of total compensation expense during
2004 related to this option grant. This employee resigned in December 2004. Deferred
compensation has been adjusted by $918,000 to reflect the forfeiture of the unvested portion of
this stock option grant.EMPLOYEE STOCK PURCHASE PLANIn 2004, we created a plan for all eligible employees to purchase our stock bi-annually at 85%
of market with funds deducted from their wages, subject to certain limitations. The purchase
price is based on the market price at the date of the purchase or the stock price at the
beginning of the offering period, if lower. Employees are permitted to cancel participation
before each bi-annual purchase date and obtain a refund of amounts withheld from their wages.
Under SFAS 123R, we believe our plan would be compensatory, and therefore we will begin to
recognize compensation expense for this plan beginning the third quarter of 2005. The ESPP has
a stockholder approved reserve of 200,000 shares of common stock as of December 31, 2004. 58




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7)
    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 $35.3
million. 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 8  Redeemable Convertible Preferred Stock. Our
registration statement on Form S-1, as amended (File No. 333-111474), was declared effective by
the SEC on April 5, 2004.8)
    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.Common stock issued upon automatic conversion is as follows: CommonShares
    
    
    Carrying
    
    
    Conversion
    
    
    StockSeries
    
    Date Issued
    
    Outstanding
    
    
    Amount
    
    
    Ratio
    
    
    IssuedA
    
    April 1998
    
    
    1,000,000
    
    
    $
    987,000
    
    
    
    0.3333
    
    
    
    333,332B
    
    December 1998, March 1999
    
    
    6,142,857
    
    
    
    10,732,000
    
    
    
    0.3333
    
    
    
    2,047,615C (1)
    
    June, August 2000
    
    
    10,000,000
    
    
    
    24,976,000
    
    
    
    0.3559
    
    
    
    3,558,521D
    
    March, April 2002
    
    
    19,290,130
    
    
    
    40,541,000
    
    
    
    0.3333
    
    
    
    6,430,033Roche (2)
    
    September 2003
    
    
    2,777,778
    
    
    
    9,522,000
    
    
    
    0.3333
    
    
    
    925,926$
    86,758,000
    
    
    
    
    
    
    
    13,295,427
   (1)
    As a result of our issuance of Series D redeemable convertible preferred stock, at a
price per share less than $2.50, the conversion ratio of the number of shares of common
stock into which each share of Series C is convertible was adjusted so that each share of
Series C is convertible into 0.3559 shares of common stock. Pursuant to this anti-dilution
provision, the conversion of Series C would result in the issuance of an additional 225,195
shares of common stock. We recorded a deemed dividend of $169,000 during 2002 to recognize
the value attributable to the increase in conversion ratio based on an estimated fair value
of the common stock.(2)
    We issued 2,777,778 shares of Series Roche redeemable convertible preferred stock and
115,740 warrants to purchase common stock at $12.96 per share to Roche for $10.0 million.
The proceeds of $10.0 million was allocated to redeemable convertible preferred stock and
additional paid-in capital based on the relative fair value of the preferred stock and the
warrants. We also recorded a beneficial conversion feature of $584,000, which increased the
net loss attributable to common stockholders during the year ended December 31, 2003.  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 $19.5 million were forfeited.9)
    STOCKHOLDERS EQUITYWARRANTSDuring 2003, in connection with the issuance of the Series Roche redeemable convertible
preferred stock, we issued 115,740 warrants to Roche to purchase our common stock at $12.96 per
share. Refer to Note 8, Redeemable Convertible Preferred Stock. The warrants are exercisable
immediately and have a termination date of August 19, 2008. At December 31, 2004, none of these
warrants had been exercised. 59




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At December 31, 2004, the lessor of our facility held 4,167 warrants to purchase our common
stock at $5.25 per share. These warrants have a termination date of March 8, 2010.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.10)
    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 December 31, 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 other potential 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 December 31, 2004, Roche has made an $8.0 million upfront
license payment and two $2.0 million 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 $5.3 million,
payable quarterly commencing September 9, 2004.During the years ended December 31, 2004, 2003, and 2002, we recognized revenue of $5.1 million,
$6.5 million and $1.2 million, respectively, under the 2002 Roche Agreement, representing the
upfront license payment and milestone payments received as of December 31, 2004, which are being
amortized over the expected development period of 7.5 years from the date of the collaboration,
and funds received related to the funding of the research collaboration. December 31,2004
    
    
    2003
    
    
    2002(in thousands)Amortization of the upfront license
payment of $8.0 million and two
milestone payments of $2.0 million
    
    $
    1,649
    
    
    $
    1,386
    
    
    $
    308Funding of the research collaboration
    
    
    3,500
    
    
    
    5,149
    
    
    
    875$
    5,149
    
    
    $
    6,535
    
    
    $
    1,183
  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 $10.0 million 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 $750,000 over a two-year
period for research collaboration efforts. 60




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Effective 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
preclinical 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 year ended December 31, 2004, we recognized revenue of $4.6 million, under the 2003
Roche Agreement. We recognized revenue of $1.1 million under the 2003 Roche Agreement during the
year ended December 31, 2003.11)
    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 $437,000 during the year ended December 31, 2004.Under this consulting agreement, we had issued in the aggregate 703,255 non-qualified stock
options as of December 31, 2003 including 91,726 granted at an exercise price of $2.70 per share
in December 2003 and 308,861 granted at an exercise price of $0.75 per share in April 2002 in
connection with the Series D financing. The options issued in 2003 and 2002 had a fair value of
approximately $1.2 million and $130,000 respectively using the Black-Scholes option-pricing
model. The fair value of the options is included as general and administrative expense in the
accompanying statement of operations.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.12)
    INCOME TAXESOur 2004 tax benefit of $249,000 represents proceeds of $258,000 received for the sale of $3.6
million of net operating loss carryforwards offset by $9,000 in state taxes and other
adjustments. Our 2003 tax benefit of $186,000 represents proceeds of $209,000 received during
2003 for the sale of $4.7 million of net operating loss carryforwards, and was partially offset
by a $23,000 provision for minimum taxes for New Jersey. Our 2002 tax provision of $21,000
represents our provision for minimum taxes for New Jersey. Our deferred tax assets as of December 31, 2004, and 2003, respectively, are estimated as
follows: December 31,2004
    
    
    2003(in thousands)Deferred tax assets:Net operating loss carryforwards
    
    $
    29,535
    
    
    $
    17,312Start-up expenditures
    
    
    1,924
    
    
    
    2,670Research and development credits
    
    
    2,202
    
    
    
    2,309Deferred income
    
    
    7,027
    
    
    
    7,989Other, net
    
    
    511
    
    
    
    513Total
    
    
    41,199
    
    
    
    30,793Valuation allowance
    
    
    41,042
    
    
    
    30,527Net deferred tax assets
    
    
    157
    
    
    
    266Deferred tax liabilities:Depreciation
    
    
    (157
    )
    
    
    (266
    )Net deferred taxes
    
    $
    
    
    
    $
    
 61




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A valuation allowance for 2004, 2003, and 2002 has been applied to offset the respective
deferred tax assets in recognition of the uncertainty that such tax benefits will be realized
based on our history of operating losses. A valuation allowance is provided when we believe it
is more likely than not that some portion of the deferred tax assets will not be realized.At December 31, 2004, we had available net operating loss carryforwards for federal and state
income tax reporting purposes of approximately $75.5 million and $64.7 million respectively, and
we had available research and development credit carryforwards for federal income tax reporting
purposes of approximately $2.2 million that are available to offset future taxable income, if
any. These carryforwards expire beginning in 2018. Our ability to use such net operating loss
and research and development credit carryforwards may be limited by change of control provisions
under Section 382 of the Internal Revenue Code, as a result of past owner changes and our
initial public offering in 2004.13)
    EQUIPMENT FINANCING AGREEMENTSWe finance certain equipment purchases through an equipment financing agreement that allows up
to $6.0 million in borrowings. The interest rate is set at the time of the borrowing. There
was $3.5 million outstanding under this equipment financing agreement as of December 31, 2004.
The effective interest rate on the borrowings as of December 31, 2004 is approximately 10.05%
per annum. We have $2.5 million of available borrowing capacity pursuant to this financing
agreement through December 31, 2005.The maturities of the equipment loans vary through 2008 and require monthly payments. A summary
of future principal payments for equipment notes payable at December 31, 2004 is as follows: (in thousands)2005
    
    $
    1,8062006
    
    
    1,1202007
    
    
    5392008
    
    
    55Total
    
    $
    3,520
  14)
    RETIREMENT PLANEffective January 1, 1999, we established a 401(k) Retirement Plan (the 401(k) Plan) which
covers substantially all of our employees. All eligible employees may elect to contribute a
portion of their wages to the 401(k) Plan, subject to certain limitations. In 2004, we began to
match 50% of the employees pre-tax contributions, up to plan limits. For 2004, $179,000 has
been charged to operations for the matching feature of the 401(k) plan.15)
    COMMITMENTS AND CONTINGENCIESLEASE AGREEMENTIn June 1999, we entered into our initial lease agreement for occupancy in our Montvale
facility, which includes laboratory and office space. Pursuant to subsequent amendments to the
lease agreement in 2000, 2001, and 2004, total occupancy space has been increased to
approximately 66,200 square feet. Our current lease agreement expires in 2014 with options to
renew thereafter. Annual minimum rental payments as of December 31, 2004 are as follows: (in thousands)2005
    
    $
    1,8842006
    
    
    1,9172007
    
    
    1,9512008
    
    
    1,9852009
    
    
    2,0202010 and subsequent
    
    
    10,269Total
    
    $
    20,026
  Rent expense was approximately $2.0 million, $1.5 million and $1.4 million in 2004, 2003, and
2002, respectively.EMPLOYMENT ARRANGEMENTSWe provide a severance arrangement for our executives and key employees, which include salary
continuance and health benefits. 62




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During 2002, we issued interest free loans to two of our executives in the aggregate amount of
$400,000 to enable each to purchase a residence near our facility located in Montvale, New
Jersey. The loans would be forgiven over three years based on continued employment. We paid
all income taxes incurred by executives in connection with the forgiveness of these loans.
Compensation expense including taxes of $190,000 was recognized in 2002. As of December 31,
2002, there was $300,000 outstanding, which was forgiven during 2003, and $547,000 including
taxes was recognized as compensation expense in 2003.COMMITMENTSWe have entered into various contract research agreements and supply agreements in connection
with preclinical, Phase I, and Phase II clinical studies.LITIGATIONThere are no material legal proceedings pending against us.INSURANCE RISKSWe are exposed to the risk of product liability claims that is inherent in the development of
drugs. If any of our compounds harm people, we may be subject to costly and damaging product
liability claims brought against us by clinical trial participants. 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. If we are sued for any injury allegedly caused by our compounds
during clinical trials, our liability could exceed our total assets and our ability to pay the
liability.16)
    QUARTERLY OPERATING RESULTS (UNAUDITED) Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,

    
    
    December 31,(in thousands)2004:Revenue
    
    $
    2,371
    
    
    $
    2,549
    
    
    $
    2,430
    
    
    $
    2,430Net loss attributable to common stockholders
    
    $
    (6,749
    )
    
    $
    (5,924
    )
    
    $
    (6,609
    )
    
    $
    (6,836
    )Basic and diluted net loss per share of
common stock
    
    $
    (5.89
    )
    
    $
    (0.29
    )
    
    $
    (0.32
    )
    
    $
    (0.33
    )2003:Revenue
    
    $
    1,723
    
    
    $
    1,368
    
    
    $
    2,088
    
    
    $
    2,439Net loss attributable to common stockholders
    
    $
    (6,299
    )
    
    $
    (7,142
    )
    
    $
    (6,275
    )
    
    $
    (9,563
    )Basic and diluted net loss per share of
common stock
    
    $
    (8.41
    )
    
    $
    (7.27
    )
    
    $
    (5.57
    )
    
    $
    (8.42
    )
 63




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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. Not applicable. 
 Item 9A. Controls and
Procedures. Evaluation of disclosure controls and procedures Based on their evaluation as of December 31, 2004, our Chief Executive Officer and Principal
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 annual report on
Form 10-K was recorded, processed, summarized and reported within the time periods specified in the
SECs rules and Form 10-K. Change in internal control over financial reporting There were no changes in our internal control over financial reporting during the quarter ended
December 31, 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. 
 Item 9B. Other
Information. Not applicable. 64




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PART III 
 Item 10. Directors and Executive Officers of the Registrant. The information required by this item other than the following information concerning the
Companys code of ethics is incorporated herein by reference to the sections entitled Proposal 1 
Election of Directors and Executive Compensation  Section 16(a) Beneficial Ownership Reporting
Compliance in the Companys definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on June 23, 2005 (the Proxy Statement). The Company intends to file the Proxy Statement
within 120 days after the end of its fiscal year. The Company has adopted a code of ethics as defined by applicable rules of the SEC and the
Nasdaq Stock Market, which is applicable to its principal executive officer, principal financial
officer, principal accounting officer / controller and other senior financial and reporting persons
and its directors. This code is publicly available on the Companys website at www.memorypharma.com
under the Investors  Code of Ethics captions. If the Company makes any amendments to the code of
ethics for its senior officers, financial and reporting persons or directors (other than technical,
administrative, or other non-substantive amendments), or grants any waivers, including implicit
waivers, from a provision of this code to such persons, the Company will disclose the nature of the
amendment or waiver, its effective date and to whom it applies on its website or in a report on
Form 8-K filed with the SEC. 
 Item 11. Executive Compensation. The information required by this item is incorporated herein by reference to the sections
entitled Executive Compensation and Related Information in the Companys Proxy Statement. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters. The information required by this item is incorporated herein by reference to the sections
entitled Security Ownership of Certain Beneficial Owners and Management in the Companys Proxy
Statement. 
 Item 13. Certain Relationships and Related Transactions. The information required by this item is incorporated herein by reference to the section
entitled Certain Relationships and Related Transactions in the Companys Proxy Statement. 
 Item 14. Principal Accountant Fees and Services. The information required by this item is incorporated herein by reference to the section
entitled Principal Accountant Fees and Services in the Companys Proxy Statement. 65




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PART IV 
 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.  (a)
    The following documents are being filed as part of this report:  (1)
    The following financial statements of the Company and the Report of Independent
Registered Public Accounting Firm are included in Part II, Item 8 of this Annual Report on
Form 10-K:Report of KPMG LLP, Independent Registered Public Accounting FirmBalance Sheets as of December 31, 2004 and 2003Statements of Operations for the years ended December 31, 2004, 2003 and 2002Statements of Changes in Stockholders Equity / (Deficit) for the years ended December 31, 2004, 2003 and 2002Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002Notes to Financial Statements  (c)
    Exhibits.The following Exhibits are incorporated herein by reference
or are filed with this Annual Report on Form 10-K as indicated below. ExhibitNumber
    
    Description3.1
    
    Second Amended and Restated Certificate of
Incorporation of the Registrant. Incorporated herein
by reference to Exhibit 3.1 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.3.2
    
    Form of Amended and Restated Certificate of
Incorporation of the Registrant to be effective upon
closing of the offering. Incorporated herein by
reference to Exhibit 3.2 to the Registrants
Registration Statement on Form S-1/A, No. 333-111474,
filed on March 2, 2004.3.3
    
    Bylaws of the Registrant. Incorporated herein by
reference to Exhibit 3.3 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.3.4
    
    Form of Amended and Restated Bylaws of the Registration
to be effective upon closing of the offering.
Incorporated herein by reference to Exhibit 3.4 to
the Registrants Registration Statement on Form S-1/A,
No. 333-111474, filed on March 2, 2004.3.5
    
    Certificate of Amendment to Second Amended and Restated
Certificate of Incorporation of the Registrant.
Incorporated herein by reference to Exhibit 3.5 to
the Registrants Registration Statement on Form S-1/A,
No. 333-111474, filed on March 2, 2004.3.6
    
    Certificate of Amendment to Second Amended and Restated
Certificate of Incorporation of the Registrant.
Incorporated herein by reference to Exhibit 3.6 to
the Registrants Registration Statement on Form S-1/A,
No. 333-111474, filed on March 2, 2004.3.7
    
    Form of Certificate of Amendment to Second Amended and
Restated Certificate of Incorporation of the
Registrant. Incorporated herein by reference to Exhibit 3.7 to the Registrants Registration Statement
on Form S-1/A, No. 333-111474, filed on April 2, 2004.3.8
    
    Form of Certificate of Amendment to Second Amended and
Restated Certificate of Incorporation of the
Registrant. Incorporated herein by reference to Exhibit 3.8 to the Registrants Registration Statement
on Form S-1/A, No. 333-111474, filed on April 5, 2004.
 66




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ExhibitNumber
    
    Description4.1
    
    Specimen Certificate evidencing shares of common stock.
Incorporated herein by reference to Exhibit 4.1 to
the Registrants Registration Statement on Form S-1/A,
No. 333-111474, filed on March 2, 2004.4.2
    
    Warrant to purchase 12,500 shares of common stock,
$0.001 par value per share, dated March 8, 2000, issued
by the Registrant to Alexandria Real Estate Equities,
L.P. Incorporated herein by reference to Exhibit 4.2
to the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.4.3
    
    Warrant to purchase 12,500 shares of common stock,
$0.001 par value per share, dated March 8, 2000, issued
by the Registrant to Alexandria Real Estate Equities,
L.P. Incorporated herein by reference to Exhibit 4.3
to the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.4.4
    
    Warrant to purchase 347,222 shares of common stock,
$0.001 par value per share, dated September 11, 2003,
issued by the Registrant to Hoffmann-La Roche Inc.
Incorporated herein by reference to Exhibit 4.4 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2004.4.5
    
    Fourth Amended and Restated Investor Rights Agreement
dated as of September 11, 2003, among the Registrant
and the parties listed therein. Incorporated herein by
reference to Exhibit 4.5 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23. 20034.6
    
    Registration Rights Agreement dated July 22, 1998
between the Registrant and the Trustees of Columbia
University in the City of New York. Incorporated
herein by reference to Exhibit 4.6 to the
Registrants Registration Statement on Form S-1, No.
333-111474, filed on December 23, 2003.4.7
    
    Form of Amendment to the Investor Rights Agreement
dated as of February 27, 2004. Incorporated herein by
reference to Exhibit 4.7 to the Registrants
Registration Statement on Form S-1/A, No. 333-111474,
filed on March 2, 20044.8
    
    Form of Amendment to the Investor Rights Agreement
dated as of April 1, 2004. Incorporated herein by
reference to Exhibit 4.8 to the Registrants
Registration Statement on Form S-1/A, No. 333-111474,
filed on April 2, 2004.10.1
    
    1998 Employee, Director and Consultant Stock Option
Plan. Incorporated herein by reference to Exhibit 10.1 to the
Registrants Registration Statement on Form S-1, No. 333-111474, filed on December 23, 2003.10.2
    
    2004 Stock Incentive Plan. Incorporated herein by
reference to Exhibit 10.2 to the Registrants
Registration Statement on Form S-1/A, No. 333-111474,
filed on March 2, 2004.10.3
    
    2004 Employee Stock Purchase Plan. Incorporated herein
by reference to Exhibit 10.3 to the Registrants
Registration Statement on Form S-1/A, No. 333-111474,
filed on March 2, 2004.10.4
    
    Lease Agreement dated as of June 4, 1999, between
ARE-100 Philips Parkway, LLC and the Registrant.
Incorporated herein by reference to Exhibit 10.4 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.
 67




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##### Table of Contents



ExhibitNumber
    
    Description10.5
    
    First Amendment to Lease dated as of February 4, 2000,
between ARE-100 Philips Parkway, LLC and the
Registrant. Incorporated herein by reference to Exhibit 10.5 to the Registrants Registration Statement
on Form S-1, No. 333-111474, filed on December 23,
2003.10.6
    
    Second Amendment to Lease dated as of November 15,
2000, between ARE-100 Philips Parkway, LLC and the
Registrant. Incorporated herein by reference to Exhibit 10.6 to the Registrants Registration Statement
on Form S-1, No. 333-111474, filed on December 23,
2003.10.7
    
    Third Amendment to Lease dated as of September 15,
2001, between ARE-100 Philips Parkway, LLC and the
Registrant. Incorporated herein by reference to Exhibit 10.7 to the Registrants Registration Statement
on Form S-1, No. 333-111474, filed on December 23,
2003.10.8*
    
    License Agreement dated as of June 13, 2001, between
Bayer AG and the Registrant. Incorporated herein by
reference to Exhibit 10.8 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.10.9*
    
    Collaboration and License Agreement dated as of July
29, 2002, among F. Hoffmann-La Roche Ltd, Hoffmann-La
Roche Inc. and the Registrant. Incorporated herein by
reference to Exhibit 10.9 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2004.10.10*
    
    Strategic Alliance Agreement dated as of August 19,
2003, among F. Hoffmann-La Roche Ltd, Hoffmann-La Roche
Inc. and the Registrant. Incorporated herein by
reference to Exhibit 10.10 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.10.11
    
    Letter Agreement dated as of October 22, 2003, amending
the Collaboration and License Agreement dated July 29,
2002, among F. Hoffmann-La Roche Ltd, Hoffmann-La Roche
Inc. and the Registrant. Incorporated herein by
reference to Exhibit 10.11 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.10.12**
    
    Employment Agreement dated as of January 5, 1998,
between Axel Unterbeck and the Registrant.
Incorporated herein by reference to Exhibit 10.12 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.10.13**
    
    Letter Agreement dated as of November 12, 1999, between
Axel Unterbeck and the Registrant. Incorporated herein
by reference to Exhibit 10.13 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.10.14**
    
    Letter Agreement dated as of March 4, 2002, between
Axel Unterbeck and the Registrant. Incorporated herein
by reference to Exhibit 10.14 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.10.15**
    
    Letter Agreement dated as of August 20, 2002, between
Axel Unterbeck and the Registrant. Incorporated herein
by reference to Exhibit 10.15 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.10.16**
    
    Employment Letter Agreement dated as of July 6, 2001,
between Anthony Scullion and the Registrant.
Incorporated herein by reference to Exhibit 10.16 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.10.17**
    
    Amendment to Employment Agreement dated as of August 6,
2001, between Anthony Scullion and the Registrant.
Incorporated herein by reference to Exhibit 10.17 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.
 68




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ExhibitNumber
    
    Description10.18**
    
    Letter Agreement dated as of March 4, 2002, between
Anthony Scullion and the Registrant. Incorporated
herein by reference to Exhibit 10.18 to the
Registrants Registration Statement on Form S-1, No.
333-111474, filed on December 23, 2003.10.19 **
    
    Employment Letter Agreement dated as of February 22,
2002, between James E. Barrett and the Registrant.
Incorporated herein by reference to Exhibit 10.19 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.10.20**
    
    Employment Letter Agreement dated as of December 18,
2001, between Gardiner F.H. Smith and the Registrant.
Incorporated herein by reference to Exhibit 10.20 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.10.21
    
    Consulting Agreement dated as of April 1, 1998, between
Dr. Eric Kandel and the Registrant. Incorporated
herein by reference to Exhibit 10.21 to the
Registrants Registration Statement on Form S-1/A, No.
333-111474, filed on February 3, 2004.10.22
    
    Amendment to Consulting Agreement dated as of June 20,
2000, between Dr. Eric Kandel and the Registrant.
Incorporated herein by reference to Exhibit 10.22 to
the Registrants Registration Statement on Form S-1/A,
No. 333-111474, filed on March 17, 2004.10.23
    
    Agreement dated as of December 18, 2003, among Dr. Eric
Kandel, the Registrant and the other parties listed
therein. Incorporated herein by reference to Exhibit
10.23 to the Registrants Registration Statement on
Form S-1/A, No. 333-111474, filed on February 3, 2004.10.24**
    
    Amendment to Employment Agreement dated as of February
27, 2004, between Axel Unterbeck and the Registrant.
Incorporated herein by reference to Exhibit 10.24 to
the Registrants Registration Statement on Form S-1/A,
No. 333-111474, filed on March 2, 2004.10.25**
    
    Employment Letter Agreement dated as of May 18, 2004,
between Jzaneen Lalani and the Registrant.
Incorporated by reference to Exhibit 10.1 of
Registrants Quarterly Report of Form 10-Q, filed for
the quarter ended June 30, 2004.10.26**
    
    Employment Letter Agreement, dated as of September 9,
2004, between David A. Lowe, Ph.D. and the Registrant.
Incorporated by reference to Exhibit 10.1 of
Registrants Current Report of Form 8-K, filed on
September 16, 2004.10.27**
    
    Registrants Form of Notice of Stock Option Grant, 24
months vesting. Incorporated by reference to Exhibit
10.2 of Registrants Current Report of Form 8-K, filed
on September 16, 2004.10.28**
    
    Registrants Form of Stock Option Agreement.
Incorporated by reference to Exhibit 10.3 of
Registrants Current Report of Form 8-K, filed on
September 16, 2004.10.29**
    
    Form of Registrants Notice of Initial Grant to members
of the Registrants Board of Directors. Incorporated
by reference to Exhibit 10.1 of Registrants Current
Report of Form 8-K, filed on September 30, 2004.10.30**
    
    Form of Registrants Notice of Subsequent Grant to
members of the Registrants Board of Directors.
Incorporated by reference to Exhibit 10.2 of
Registrants Current Report of Form 8-K, filed on
September 30, 2004.10.31**
    
    Consulting Agreement, dated as of July 2, 2004, between
James E. Barrett, Ph.D. and the Registrant.
Incorporated by reference to Exhibit 10.1 of
Registrants Quarterly Report of Form 10-Q, filed for
the quarter ended September 30, 2004.
 69




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##### Table of Contents



ExhibitNumber
    
    Description10.32
    
    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 Registrant.
Incorporated by reference to Exhibit 10.2 of
Registrants Quarterly Report of Form 10-Q, filed for
the quarter ended September 30, 2004.10.33**
    
    Registrants Form of Notice of Grant, 48 months
vesting. Incorporated by reference to Exhibit 10.3 of
Registrants Quarterly Report of Form 10-Q, filed for
the quarter ended September 30, 2004.10.34**
    
    Letter Agreement, dated as of August 2, 2004, between
Gardiner F. H. Smith and the Registrant. Incorporated
by reference to Exhibit 10.4 of Registrants Quarterly
Report of Form 10-Q, filed for the quarter ended
September 30, 2004.10.35**
    
    Consulting Agreement, dated as of December 14, 2004,
between Dennis M. Keane and the Registrant.
Incorporated by reference to Exhibit 10.1 of
Registrants Current Report of Form 8-K, filed on
December 14, 2004.10.36
    
    Description of Board of Directors Compensation.
Incorporated by reference to Exhibit 10.1 of
Registrants Current Report of Form 8-K, filed on
December 16, 2004.10.37**
    
    Employment Letter Agreement dated as of March 3, 2005
between Joseph M. Donabauer and the Registrant.
Incorporated by reference to Exhibit 10.1 of
Registrants Current Report of Form 8-K, filed on March
9, 2005.10.38**
    
    Separation Agreement, dated March 15, 2005, between the
Registrant and Axel J. Unterbeck, Ph.D. Incorporated
by reference to Exhibit 10.1 of Registrants Current
Report of Form 8-K, filed on March 15, 2005.10.39**
    
    Consulting Agreement, dated March 15, 2005, between the
Registrant and Axel J. Unterbeck, Ph.D. Incorporated
by reference to Exhibit 10.2 of Registrants Current
Report of Form 8-K, filed on March 9, 2005.10.40
    
    Amendment to Strategic Alliance Agreement dated as of
February 28, 2005, among F. Hoffmann-La Roche Ltd,
Hoffmann-La Roche Inc. and the Registrant.23.1
    
    Consent of KPMG LLP.31.1
    
    Certification by the Chief Executive Officer pursuant
to Rule 13a-14(a) under the Securities Exchange Act of
1934.31.2
    
    Certification by the Chief Financial Officer pursuant
to Rule 13a-14(a) under the Securities Exchange Act of
1934.32.1
    
    Certification Pursuant to 18 USC. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
   *
    
    Confidential treatment granted as to certain portions, which portions have been omitted and
filed
separately with the SEC.**
    
    Indicates management contract or compensatory plan or arrangement. 70




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
Memory Pharmaceuticals Corp. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Montvale, State of New Jersey, on this 31st
day of March 2005. MEMORY PHARMACEUTICALS CORP.By:
    
    /s/ Tony ScullionTony ScullionChief Executive Officer
 71




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##### Table of Contents



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated. Signature
    
    Title
    Date/s/ Tony Scullion

Tony Scullion
    
    Chief Executive Officer and
Director (Principal Executive
Officer)
    
    March 31, 2005/s/ Joseph M. Donabauer

Joseph M. Donabauer
    
    Vice President & Controller
(Principal Accounting and
Financial Officer)
    
    March 31, 2005/s/ Jonathan Fleming

Jonathan Fleming
    
    Chairman of the Board of Directors
    
    March 31, 2005/s/ Axel J. Unterbeck, Ph.D.

Axel J. Unterbeck, Ph.D.
    
    President and Director
    
    March 31, 2005/s/ Anthony B. Evnin, Ph.D.

Anthony B. Evnin, Ph.D.
    
    Director
    
    March 31, 2005/s/ Walter Gilbert, Ph.D.

Walter Gilbert, Ph.D.
    
    Director
    
    March 31, 2005/s/ Robert I. Kriebel

Robert I. Kriebel
    
    Director
    
    March 31, 2005/s/ Michael Meyers, MPH

Michael Meyers, MPH
    
    Director
    
    March 31, 2005/s/ Peter F. Young

Peter F. Young
    
    Director
    
    March 31, 2005
 72




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##### Table of Contents



Exhibit Index ExhibitNumber
    
    Description3.1
    
    Second Amended and Restated Certificate of
Incorporation of the Registrant. Incorporated herein
by reference to Exhibit 3.1 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.3.2
    
    Form of Amended and Restated Certificate of
Incorporation of the Registrant to be effective upon
closing of the offering. Incorporated herein by
reference to Exhibit 3.2 to the Registrants
Registration Statement on Form S-1/A, No. 333-111474,
filed on March 2, 2004.3.3
    
    Bylaws of the Registrant. Incorporated herein by
reference to Exhibit 3.3 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.3.4
    
    Form of Amended and Restated Bylaws of the Registration
to be effective upon closing of the offering.
Incorporated herein by reference to Exhibit 3.4 to
the Registrants Registration Statement on Form S-1/A,
No. 333-111474, filed on March 2, 2004.3.5
    
    Certificate of Amendment to Second Amended and Restated
Certificate of Incorporation of the Registrant.
Incorporated herein by reference to Exhibit 3.5 to
the Registrants Registration Statement on Form S-1/A,
No. 333-111474, filed on March 2, 2004.3.6
    
    Certificate of Amendment to Second Amended and Restated
Certificate of Incorporation of the Registrant.
Incorporated herein by reference to Exhibit 3.6 to
the Registrants Registration Statement on Form S-1/A,
No. 333-111474, filed on March 2, 2004.3.7
    
    Form of Certificate of Amendment to Second Amended and
Restated Certificate of Incorporation of the
Registrant. Incorporated herein by reference to
Exhibit 3.7 to the Registrants Registration Statement
on Form S-1/A, No. 333-111474, filed on April 2, 2004.3.8
    
    Form of Certificate of Amendment to Second Amended and
Restated Certificate of Incorporation of the
Registrant. Incorporated herein by reference to
Exhibit 3.8 to the Registrants Registration Statement
on Form S-1/A, No. 333-111474, filed on April 5, 2004.4.1
    
    Specimen Certificate evidencing shares of common stock.
Incorporated herein by reference to Exhibit 4.1 to
the Registrants Registration Statement on Form S-1/A,
No. 333-111474, filed on March 2, 2004.4.2
    
    Warrant to purchase 12,500 shares of common stock,
$0.001 par value per share, dated March 8, 2000, issued
by the Registrant to Alexandria Real Estate Equities,
L.P. Incorporated herein by reference to Exhibit 4.2
to the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.4.3
    
    Warrant to purchase 12,500 shares of common stock,
$0.001 par value per share, dated March 8, 2000, issued
by the Registrant to Alexandria Real Estate Equities,
L.P. Incorporated herein by reference to Exhibit 4.3
to the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.4.4
    
    Warrant to purchase 347,222 shares of common stock,
$0.001 par value per share, dated September 11, 2003,
issued by the Registrant to Hoffmann-La Roche Inc.
Incorporated herein by reference to Exhibit 4.4 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2004.4.5
    
    Fourth Amended and Restated Investor Rights Agreement
dated as of September 11, 2003, among the Registrant
and the parties listed therein. Incorporated herein by
reference to Exhibit 4.5 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23. 2003
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ExhibitNumber
    
    Description4.6
    
    Registration Rights Agreement dated July 22, 1998
between the Registrant and the Trustees of Columbia
University in the City of New York. Incorporated
herein by reference to Exhibit 4.6 to the
Registrants Registration Statement on Form S-1, No.
333-111474, filed on December 23, 2003.4.7
    
    Form of Amendment to the Investor Rights Agreement
dated as of February 27, 2004. Incorporated herein by
reference to Exhibit 4.7 to the Registrants
Registration Statement on Form S-1/A, No. 333-111474,
filed on March 2, 20044.8
    
    Form of Amendment to the Investor Rights Agreement
dated as of April 1, 2004. Incorporated herein by
reference to Exhibit 4.8 to the Registrants
Registration Statement on Form S-1/A, No. 333-111474,
filed on April 2, 2004.10.1
    
    1998 Employee, Director and Consultant Stock Option
Plan. Incorporated herein by reference to Exhibit
10.1 to the Registrants Registration Statement on Form
S-1, No. 333-111474, filed on December 23, 2003.10.2
    
    2004 Stock Incentive Plan. Incorporated herein by
reference to Exhibit 10.2 to the Registrants
Registration Statement on Form S-1/A, No. 333-111474,
filed on March 2, 2004.10.3
    
    2004 Employee Stock Purchase Plan. Incorporated herein
by reference to Exhibit 10.3 to the Registrants
Registration Statement on Form S-1/A, No. 333-111474,
filed on March 2, 2004.10.4
    
    Lease Agreement dated as of June 4, 1999, between
ARE-100 Philips Parkway, LLC and the Registrant.
Incorporated herein by reference to Exhibit 10.4 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.10.5
    
    First Amendment to Lease dated as of February 4, 2000,
between ARE-100 Philips Parkway, LLC and the
Registrant. Incorporated herein by reference to
Exhibit 10.5 to the Registrants Registration Statement
on Form S-1, No. 333-111474, filed on December 23,
2003.10.6
    
    Second Amendment to Lease dated as of November 15,
2000, between ARE-100 Philips Parkway, LLC and the
Registrant. Incorporated herein by reference to
Exhibit 10.6 to the Registrants Registration Statement
on Form S-1, No. 333-111474, filed on December 23,
2003.10.7
    
    Third Amendment to Lease dated as of September 15,
2001, between ARE-100 Philips Parkway, LLC and the
Registrant. Incorporated herein by reference to
Exhibit 10.7 to the Registrants Registration Statement
on Form S-1, No. 333-111474, filed on December 23,
2003.10.8*
    
    License Agreement dated as of June 13, 2001, between
Bayer AG and the Registrant. Incorporated herein by
reference to Exhibit 10.8 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.10.9*
    
    Collaboration and License Agreement dated as of July
29, 2002, among F. Hoffmann-La Roche Ltd, Hoffmann-La
Roche Inc. and the Registrant. Incorporated herein by
reference to Exhibit 10.9 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2004.
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##### Table of Contents



ExhibitNumber
    
    Description10.10*
    
    Strategic Alliance Agreement dated as of August 19,
2003, among F. Hoffmann-La Roche Ltd, Hoffmann-La Roche
Inc. and the Registrant. Incorporated herein by
reference to Exhibit 10.10 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.10.11
    
    Letter Agreement dated as of October 22, 2003, amending
the Collaboration and License Agreement dated July 29,
2002, among F. Hoffmann-La Roche Ltd, Hoffmann-La Roche
Inc. and the Registrant. Incorporated herein by
reference to Exhibit 10.11 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.10.12**
    
    Employment Agreement dated as of January 5, 1998,
between Axel Unterbeck and the Registrant.
Incorporated herein by reference to Exhibit 10.12 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.10.13**
    
    Letter Agreement dated as of November 12, 1999, between
Axel Unterbeck and the Registrant. Incorporated herein
by reference to Exhibit 10.13 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.10.14**
    
    Letter Agreement dated as of March 4, 2002, between
Axel Unterbeck and the Registrant. Incorporated herein
by reference to Exhibit 10.14 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.10.15**
    
    Letter Agreement dated as of August 20, 2002, between
Axel Unterbeck and the Registrant. Incorporated herein
by reference to Exhibit 10.15 to the Registrants
Registration Statement on Form S-1, No. 333-111474,
filed on December 23, 2003.10.16**
    
    Employment Letter Agreement dated as of July 6, 2001,
between Anthony Scullion and the Registrant.
Incorporated herein by reference to Exhibit 10.16 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.10.17**
    
    Amendment to Employment Agreement dated as of August 6,
2001, between Anthony Scullion and the Registrant.
Incorporated herein by reference to Exhibit 10.17 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.10.18**
    
    Letter Agreement dated as of March 4, 2002, between
Anthony Scullion and the Registrant. Incorporated
herein by reference to Exhibit 10.18 to the
Registrants Registration Statement on Form S-1, No.
333-111474, filed on December 23, 2003.10.19 **
    
    Employment Letter Agreement dated as of February 22,
2002, between James E. Barrett and the Registrant.
Incorporated herein by reference to Exhibit 10.19 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.10.20**
    
    Employment Letter Agreement dated as of December 18,
2001, between Gardiner F.H. Smith and the Registrant.
Incorporated herein by reference to Exhibit 10.20 to
the Registrants Registration Statement on Form S-1,
No. 333-111474, filed on December 23, 2003.10.21
    
    Consulting Agreement dated as of April 1, 1998, between
Dr. Eric Kandel and the Registrant. Incorporated
herein by reference to Exhibit 10.21 to the
Registrants Registration Statement on Form S-1/A, No.
333-111474, filed on February 3, 2004.10.22
    
    Amendment to Consulting Agreement dated as of June 20,
2000, between Dr. Eric Kandel and the Registrant.
Incorporated herein by reference to Exhibit 10.22 to
the Registrants Registration Statement on Form S-1/A,
No. 333-111474, filed on March 17, 2004.
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##### Table of Contents



ExhibitNumber
    
    Description10.23
    
    Agreement dated as of December 18, 2003, among Dr. Eric
Kandel, the Registrant and the other parties listed
therein. Incorporated herein by reference to Exhibit
10.23 to the Registrants Registration Statement on
Form S-1/A, No. 333-111474, filed on February 3, 2004.10.24**
    
    Amendment to Employment Agreement dated as of February
27, 2004, between Axel Unterbeck and the Registrant.
Incorporated herein by reference to Exhibit 10.24 to
the Registrants Registration Statement on Form S-1/A,
No. 333-111474, filed on March 2, 2004.10.25**
    
    Employment Letter Agreement dated as of May 18, 2004,
between Jzaneen Lalani and the Registrant.
Incorporated by reference to Exhibit 10.1 of
Registrants Quarterly Report of Form 10-Q, filed for
the quarter ended June 30, 2004.10.26**
    
    Employment Letter Agreement, dated as of September 9,
2004, between David A. Lowe, Ph.D. and the Registrant.
Incorporated by reference to Exhibit 10.1 of
Registrants Current Report of Form 8-K, filed on
September 16, 2004.10.27**
    
    Registrants Form of Notice of Stock Option Grant, 24
months vesting. Incorporated by reference to Exhibit
10.2 of Registrants Current Report of Form 8-K, filed
on September 16, 2004.10.28**
    
    Registrants Form of Stock Option Agreement.
Incorporated by reference to Exhibit 10.3 of
Registrants Current Report of Form 8-K, filed on
September 16, 2004.10.29**
    
    Form of Registrants Notice of Initial Grant to members
of the Registrants Board of Directors. Incorporated
by reference to Exhibit 10.1 of Registrants Current
Report of Form 8-K, filed on September 30, 2004.10.30**
    
    Form of Registrants Notice of Subsequent Grant to
members of the Registrants Board of Directors.
Incorporated by reference to Exhibit 10.2 of
Registrants Current Report of Form 8-K, filed on
September 30, 2004.10.31**
    
    Consulting Agreement, dated as of July 2, 2004, between
James E. Barrett, Ph.D. and the Registrant.
Incorporated by reference to Exhibit 10.1 of
Registrants Quarterly Report of Form 10-Q, filed for
the quarter ended September 30, 2004.10.32
    
    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 Registrant.
Incorporated by reference to Exhibit 10.2 of
Registrants Quarterly Report of Form 10-Q, filed for
the quarter ended September 30, 2004.10.33**
    
    Registrants Form of Notice of Grant, 48 months
vesting. Incorporated by reference to Exhibit 10.3 of
Registrants Quarterly Report of Form 10-Q, filed for
the quarter ended September 30, 2004.10.34**
    
    Letter Agreement, dated as of August 2, 2004, between
Gardiner F. H. Smith and the Registrant. Incorporated
by reference to Exhibit 10.4 of Registrants Quarterly
Report of Form 10-Q, filed for the quarter ended
September 30, 2004.10.35**
    
    Consulting Agreement, dated as of December 14, 2004,
between Dennis M. Keane and the Registrant.
Incorporated by reference to Exhibit 10.1 of
Registrants Current Report of Form 8-K, filed on
December 14, 2004.10.36
    
    Description of Board of Directors Compensation.
Incorporated by reference to Exhibit 10.1 of
Registrants Current Report of Form 8-K, filed on
December 16, 2004.
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##### Table of Contents



ExhibitNumber
    
    Description10.37**
    
    Employment Letter Agreement dated as of March 3, 2005
between Joseph M. Donabauer and the Registrant.
Incorporated by reference to Exhibit 10.1 of
Registrants Current Report of Form 8-K, filed on March
9, 2005.10.38**
    
    Separation Agreement, dated March 15, 2005, between the
Registrant and Axel J. Unterbeck, Ph.D. Incorporated
by reference to Exhibit 10.1 of Registrants Current
Report of Form 8-K, filed on March 15, 2005.10.39**
    
    Consulting Agreement, dated March 15, 2005, between the
Registrant and Axel J. Unterbeck, Ph.D. Incorporated
by reference to Exhibit 10.2 of Registrants Current
Report of Form 8-K, filed on March 9, 2005.10.40
    
    Amendment to Strategic Alliance Agreement dated as of
February 28, 2005, among F. Hoffmann-La Roche Ltd,
Hoffmann-La Roche Inc. and the Registrant.23.1
    
    Consent of KPMG LLP.31.1
    
    Certification by the Chief Executive Officer pursuant
to Rule 13a-14(a) under the Securities Exchange Act of
1934.31.2
    
    Certification by the Chief Financial Officer pursuant
to Rule 13a-14(a) under the Securities Exchange Act of
1934.32.1
    
    Certification Pursuant to 18 USC. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
   *
    
    Confidential treatment granted as to certain portions, which portions have been omitted and
filed
separately with the Securities and Exchange Commission.**
    
    Indicates management contract or compensatory plan or arrangement. 77