**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM10-Q**

| **x****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|----------------------------------------------------------------------------------------------------|
| ** **                                                                                         |
| **For the quarterly period ended  September 30, 2007**                                             |
| ** **                                                                                         |
| **or**                                                                                             |
| ** **                                                                                         |
| **o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

**For thetransition periodfrom                         to                         **

**Commissionfile number: 000-25571**

**TORREYPINESTHERAPEUTICS, INC.**

(Exact name ofregistrant as specified in its charter)

| **Delaware**                                  | **86-0883978**         |
|-----------------------------------------------|------------------------|
| (State or other  jurisdiction of              | (IRS Employer Id. No.) |
| incorporation or  organization)               |                   |
|                                          |                   |
| **11085  North Torrey Pines Road, Suite 300** |                   |
| **La  Jolla, CA**                             | **92037**              |
| (Address of principal  executive offices)     | (Zip code)             |

Registrant’s telephonenumber, including area code: **(858-623-5665)**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes   x   No   o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large Accelerated filer   o | Accelerated  Filer   o | Non-accelerated  filer   x |
|--------------------------------------------|---------------------------------------|-------------------------------------------|

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct). Yes   o   No   x

As of November 8, 2007,there were 15,738,485 shares of our Common Stock outstanding.

 

 

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**TorreyPinesTherapeutics, Inc.**

**INDEX**
| PART I.    |   | FINANCIAL INFORMATION                                                                                              |
|------------|--------|--------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                               |
| Item 1.    |   | Financial Statements                                                                                               |
|       |   |                                                                                                               |
|       |   | Consolidated Balance Sheets as of September 30, 2007  (Unaudited) and December 31, 2006                            |
|       |   |                                                                                                               |
|       |   | Consolidated Statements of Operations for the Three  and Nine Months Ended September 30, 2007 and 2006 (Unaudited) |
|       |   |                                                                                                               |
|       |   | Consolidated Statements of Cash Flows for the Nine  Months Ended September 30, 2007 and 2006  (Unaudited)     |
|       |   |                                                                                                               |
|       |   | Notes to Consolidated Financial Statements                                                                         |
|       |   |                                                                                                               |
| Item 2.    |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |
|       |   |                                                                                                               |
| Item 3.    |   | Quantitative and Qualitative Disclosures About Market  Risk                                                        |
|       |   |                                                                                                               |
| Item 4.    |   | Controls and Procedures                                                                                            |
|       |   |                                                                                                               |
| PART  II.  |   | OTHER  INFORMATION                                                                                                 |
|       |   |                                                                                                               |
| Item  1.   |   | Legal  Proceedings                                                                                                 |
|       |   |                                                                                                               |
| Item 1A.   |   | Risk Factors                                                                                                       |
|       |   |                                                                                                               |
| Item 6.    |   | Exhibits                                                                                                           |
|       |   |                                                                                                               |
| Signatures |

 

 

2

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**PART I. FINANCIAL INFORMATION**

**ITEM1.  Financial Statements**

**TorreyPinesTherapeutics, Inc.**

**Consolidated Balance Sheets**
| ** **                                                                                                                                                                                | ** ** | **September 30,**

**2007** | ** ** | **December 31,**

**2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                | ** ** | **(Unaudited)**             | ** ** | ** **                      | ** ** |
| **Assets**                                                                                                                                                                                | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| Current assets                                                                                                                                                                            |       |                        |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                                |       | $                           | 39,723,353 |                            | $          | 55,382,962 |   |
| Prepaid expenses  and other current assets                                                                                                                                                |       | 288,806                     |       | 581,491                         |       |
| Total current  assets                                                                                                                                                                     |       | 40,012,159                  |       | 55,964,453                      |       |
|                                                                                                                                                                                      |       |                        |       |                            |       |
| Property and  equipment, net                                                                                                                                                              |       | 586,786                     |       | 795,902                         |       |
| Purchased  patents, net                                                                                                                                                                   |       | 3,612,353                   |       | 3,905,478                       |       |
| Investment in  OXIS International, Inc.                                                                                                                                              |       | 2,776,210                   |       | 2,719,342                       |       |
| Other assets                                                                                                                                                                              |       | 49,397                      |       | 49,696                          |       |
|                                                                                                                                                                                      |       |                        |       |                            |       |
| Total  assets                                                                                                                                                                             |       | $                           | 47,036,905 |                            | $          | 63,434,871 |   |
| ** **                                                                                                                                                                                | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| **Liabilities  and stockholders’ equity**                                                                                                                                            | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| Liabilities                                                                                                                                                                               |       |                        |       |                            |       |
| Current  liabilities                                                                                                                                                                      |       |                        |       |                            |       |
| Accounts payable  and accrued liabilities                                                                                                                                                 |       | $                           | 5,267,405  |                            | $          | 4,254,265 |   |
| Long-term debt,  current portion                                                                                                                                                          |       | 3,476,982                   |       | 3,200,826                       |       |
| Common stock  warrant liability                                                                                                                                                           |       | —                      |       | 4,815,000                       |       |
| Total current  liabilities                                                                                                                                                                |       | 8,744,387                   |       | 12,270,091                      |       |
|                                                                                                                                                                                      |       |                        |       |                            |       |
| Long-term debt,  net of current portion                                                                                                                                                   |       | 1,852,019                   |       | 4,396,649                       |       |
| Deferred revenue                                                                                                                                                                          |       | 2,083,333                   |       | 2,183,333                       |       |
| Deferred rent                                                                                                                                                                             |       | 18,892                      |       | 15,824                          |       |
| Total  liabilities                                                                                                                                                                        |       | 12,698,631                  |       | 18,865,897                      |       |
|                                                                                                                                                                                      |       |                        |       |                            |       |
| Commitments and  contingencies                                                                                                                                                            |       |                        |       |                            |       |
|                                                                                                                                                                                      |       |                        |       |                            |       |
| Stockholders’  equity                                                                                                                                                                |       |                        |       |                            |       |
| Preferred stock,  $0.001 par value, 15,000,000 shares authorized, 0 shares outstanding at  September 30, 2007 and December 31, 2006, respectively                                    |       | —                      |       | —                          |       |
| Common stock,  $0.001 par value, 150,000,000 shares authorized, 15,737,910 and 15,676,964  shares issued and outstanding at September 30, 2007 and   December 31, 2006, respectively |       | 15,738                      |       | 15,677                          |       |
| Additional  paid-in capital                                                                                                                                                               |       | 122,171,363                 |       | 117,417,003                     |       |
| Accumulated  other comprehensive income                                                                                                                                                   |       | 396,226                     |       | 168,301                         |       |
| Accumulated  deficit                                                                                                                                                                      |       | (88,245,053                 | )          | (73,032,007                     | )          |
| Total  stockholders’ equity                                                                                                                                                          |       | 34,338,274                  |       | 44,568,974                      |       |
|                                                                                                                                                                                      |       |                        |       |                            |       |
| Total  liabilities and stockholders’ equity                                                                                                                                          |       | $                           | 47,036,905 |                            | $          | 63,434,871 |   |
|                                                                                                                                                                                           |            |                             |            |                                 |            |  |  |  |

 

*Seeaccompanying notes.*

3

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**TorreyPinesTherapeutics, Inc.**

**Consolidated Statements of Operations**

(Unaudited)

| ** **                                                                                                                    | ** ** | **Three Months Ended**

**September 30,** | ** ** | **Nine Months Ended**

**September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                    | ** ** | **2007**                                            | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue                                                                                                                       |       |                                                |       |                                          |       |   |   |   |   |
| License and  option fees                                                                                                      |       | $                                                   | 1,700,000  |                                          | $          | 1,700,000 |   | $ | 5,100,000 |   | $ | 5,100,000 |   |
| Research funding                                                                                                              |       | 762,500                                             |       | 762,500                                       |       | 2,287,500 |   | 2,287,500 |   |
| Total revenue                                                                                                                 |       | 2,462,500                                           |       | 2,462,500                                     |       | 7,387,500 |   | 7,387,500 |   |
|                                                                                                                          |       |                                                |       |                                          |       |   |   |   |   |
| Operating  expenses:                                                                                                          |       |                                                |       |                                          |       |   |   |   |   |
| Research and  development                                                                                                     |       | 8,160,942                                           |       | 4,469,639                                     |       | 20,390,016 |   | 17,640,251 |   |
| General and  administrative                                                                                                   |       | 1,351,162                                           |       | 680,384                                       |       | 4,209,017 |   | 1,986,166 |   |
| Total operating  expenses                                                                                                     |       | 9,512,104                                           |       | 5,150,023                                     |       | 24,599,033 |   | 19,626,417 |   |
|                                                                                                                          |       |                                                |       |                                          |       |   |   |   |   |
| Loss from  operations                                                                                                         |       | (7,049,604                                          | )          | (2,687,523                                    | )          | (17,211,533 | ) | (12,238,917 | ) |
|                                                                                                                          |       |                                                |       |                                          |       |   |   |   |   |
| Other income  (expense)                                                                                                       |       |                                                |       |                                          |       |   |   |   |   |
| Interest income                                                                                                               |       | 504,290                                             |       | 258,959                                       |       | 1,699,270 |   | 732,218 |   |
| Interest expense                                                                                                              |       | (193,481                                            | )          | (278,985                                      | )          | (646,651 | ) | (735,393 | ) |
| Equity in income  (loss) of OXIS International, Inc.                                                                          |       | (32,001                                             | )          | —                                        |       | 56,867 |   | — |   |
| Warrant  valuation adjustment                                                                                                 |       | —                                              |       | —                                        |       | 892,712 |   | — |   |
| Gain on asset  disposal                                                                                                       |       | (3,711                                              | )          | —                                        |       | (3,711 | ) | 2,584 |   |
| Total other  income (expense)                                                                                                 |       | 275,097                                             |       | (20,026                                       | )          | 1,998,487 |   | (591 | ) |
|                                                                                                                          |       |                                                |       |                                          |       |   |   |   |   |
| Net loss                                                                                                                      |       | (6,774,507                                          | )          | (2,707,549                                    | )          | (15,213,046 | ) | (12,239,508 | ) |
|                                                                                                                          |       |                                                |       |                                          |       |   |   |   |   |
| Dividends and  accretion to redemption value of redeemable convertible preferred stock                                        |       | —                                              |       | (1,237,082                                    | )          | — |   | (3,533,573 | ) |
|                                                                                                                          |       |                                                |       |                                          |       |   |   |   |   |
| Net loss  attributable to common stockholders                                                                                 |       | $                                                   | (6,774,507 | )                                             | $          | (3,944,631 | ) | $ | (15,213,046 | ) | $ | (15,773,081 | ) |
|                                                                                                                          |       |                                                |       |                                          |       |   |   |   |   |
| Basic and  diluted net loss per share attributable to common stockholders                                                     |       | $                                                   | (0.43      | )                                             | $          | (7.18 | )  | $ | (0.97 | ) | $ | (29.19 | ) |
|                                                                                                                          |       |                                                |       |                                          |       |   |   |   |   |
| Weighted average  shares used in the computation of basic and diluted net loss per share  attributable to common stockholders |       | 15,733,970                                          |       | 549,481                                       |       | 15,711,212 |   | 540,395 |   |
|                                                                                                                               |            |                                                     |            |                                               |            |  |  |  |  |  |  |  |  |  |

 

*Seeaccompanying notes.*

 

4

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**TorreyPinesTherapeutics, Inc.**

**Consolidated Statements of Cash Flows**

(Unaudited)

| ** **                                                                   | ** ** | **Nine Months Ended**

**September 30,** | ** **  |
|------------------------------------------------------------------------------|------------|-----------------------------------------------|-------------|
| ** **                                                                   | ** ** | **2007**                                      | ** **  | **2006** | ** ** |
| **Operating  activities**                                                    | ** ** | ** **                                    | ** **  | ** ** | ** ** |
| Net loss                                                                     |       | $                                             | (15,213,046 | ) | $ | (12,239,508 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                          |        |   |   |
| Depreciation                                                                 |       | 287,689                                       |        | 503,639 |   |
| Stock-based  compensation                                                    |       | 782,723                                       |        | 79,199 |   |
| Amortization of  debt discount                                               |       | 98,737                                        |        | 81,015 |   |
| Amortization of  purchased patents                                           |       | 293,125                                       |        | — |   |
| Deferred rent                                                                |       | 3,068                                         |        | 11,509 |   |
| Deferred revenue                                                             |       | (100,000                                      | )           | (5,100,000 | ) |
| Loss (gain) on  disposal of assets                                           |       | 3,711                                         |        | (2,584 | ) |
| Equity in income  of OXIS International, Inc.                           |       | (56,867                                       | )           | — |   |
| Change in  warrant valuation                                                 |       | (892,712                                      | )           | — |   |
| Changes in operating  assets and liabilities:                                |       |                                          |        |   |   |
| Prepaid expenses  and other current assets                                   |       | 297,289                                       |        | 122,451 |   |
| Other assets                                                                 |       | 299                                           |        | (2,243,351 | ) |
| Accounts payable  and accrued liabilities                                    |       | 998,777                                       |        | 652,189 |   |
| Net cash used in  operating activities                                       |       | (13,497,207                                   | )           | (18,135,441 | ) |
| ** **                                                                   | ** ** | ** **                                    | ** **  | ** ** | ** ** |
| **Investing  activities**                                                    | ** ** | ** **                                    | ** **  | ** ** | ** ** |
| Purchases of  property and equipment                                         |       | (82,284                                       | )           | (133,483 | ) |
| Net cash used in  investing activities                                       |       | (82,284                                       | )           | (133,483 | ) |
| ** **                                                                   | ** ** | ** **                                    | ** **  | ** ** | ** ** |
| **Financing  activities**                                                    | ** ** | ** **                                    | ** **  | ** ** | ** ** |
| Issuance of  common stock                                                    |       | 49,411                                        |        | 336,091 |   |
| Issuance of  preferred stock, net of issuance costs                          |       | —                                        |        | 6,322,165 |   |
| Proceeds from  long-term debt                                                |       | —                                        |        | 5,000,000 |   |
| Payments on  long-term debt                                                  |       | (2,367,211                                    | )           | (1,359,785 | ) |
| Net cash  provided by (used in) financing activities                         |       | (2,317,800                                    | )           | 10,298,471 |   |
|                                                                         |       |                                          |        |   |   |
| Effect of  exchange rate changes on cash                                     |       | 237,682                                       |        | 237,824 |   |
|                                                                         |       |                                          |        |   |   |
| Net decrease in  cash and cash equivalents                                   |       | (15,659,609                                   | )           | (7,732,629 | ) |
|                                                                         |       |                                          |        |   |   |
| Cash and cash  equivalents at beginning of period                            |       | 55,382,962                                    |        | 28,756,888 |   |
|                                                                         |       |                                          |        |   |   |
| Cash and cash equivalents  at end of period                                  |       | $                                             | 39,723,353  |   | $ | 21,024,259 |   |
| ** **                                                                   | ** ** | ** **                                    | ** **  | ** ** | ** ** |
| **Supplemental  disclosure of cash flow information**                        | ** ** | ** **                                    | ** **  | ** ** | ** ** |
| Cash paid for  interest                                                      |       | $                                             | 547,914     |   | $ | 654,378 |   |
| Warrant issued  in conjunction with debt                                     |       | $                                             | —      |   | $ | 212,665 |   |
| Noncash  purchases of property and equipment                                 |       | $                                             | —      |   | $ | 2,584 |   |
|                                                                              |            |                                               |             |  |  |  |  |  |

 

*Seeaccompanying notes.*

 

5

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**TorreyPinesTherapeutics, Inc.**

**Notes to Consolidated FinancialStatements**

**September30, 2007**

(Unaudited)

**(1) Basisof Presentation**

The accompanyingunaudited consolidated financial statements of TorreyPines Therapeutics, Inc.(together with our wholly-owned subsidiaries, TPTX, Inc. and TorreyPinesTherapeutics Europe NV) should be read in conjunction with the auditedfinancial statements and notes thereto as of, and for the year ended December31, 2006 included in our Annual Report on Form 10-K filed with the Securitiesand Exchange Commission (the “SEC”).  The accompanying financialstatements have been prepared in accordance with United States generallyaccepted accounting principles (“GAAP”) and with the rules and regulations ofthe SEC related to a quarterly report on Form 10-Q.  Accordingly,they do not include all of the information and disclosures required by GAAP forcomplete financial statements.  In the opinion of our management, theaccompanying financial statements reflect all adjustments (consisting of normalrecurring adjustments) that are necessary for a fair presentation of thefinancial position, results of operations and cash flows for the interimperiods presented.  Interim results are not necessarily indicative ofresults for a full year.

The preparation offinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and the accompanying notes.  Actual results could differ fromthose estimates.

Prior to October3, 2006 we were known as Axonyx Inc. On October 3, 2006, we completed abusiness combination, referred to as the Merger, with TorreyPines Therapeutics,Inc. (now known as TPTX, Inc.).  For accounting purposes, we were deemedto be the acquired entity in the Merger, and the Merger was accounted for as areverse acquisition. In connection with the Merger, we changed our name toTorreyPines Therapeutics, Inc. and effected an 8-for-1 reverse stock split ofour common stock. Our financial statements reflect the historical results ofTPTX, Inc. prior to the Merger and that of the combined company following theMerger, and do not include the historical results of Axonyx Inc. prior to thecompletion of the Merger. All share and per share disclosures have beenretroactively adjusted to reflect the exchange of shares in the Merger, and the8-for-1 reverse split of our common stock on October 3, 2006.  Referencesin this report to “TorreyPines,” “Company,” “we,” “us” and “our” refer toTorreyPines Therapeutics, Inc. and its subsidiaries.

**(2) ComprehensiveLoss**

Statement ofFinancial Accounting Standards (“SFAS”) No. 130,*Reporting Comprehensive Income,* requires that allcomponents of comprehensive income, including net income or loss and foreigncurrency translation adjustments, be reported in the financial statements inthe period in which they are recognized. Comprehensive income or loss isdefined as the change in equity during a period from transactions and otherevents and circumstances from non-owner sources. Our comprehensive loss is asfollows:
| ** **                                | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                            | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                      |       |                                                |       |                                          |       |   |   |   |   |
| Net loss                                  |       | $                                                   | (6,774,507 | )                                             | $          | (2,707,549 | ) | $ | (15,213,046 | ) | $ | (12,239,508 | ) |
|                                      |       |                                                |       |                                          |       |   |   |   |   |
| Foreign currency  translation adjustments |       | 158,412                                             |       | 38,308                                        |       | 227,924 |   | 237,571 |   |
|                                      |       |                                                |       |                                          |       |   |   |   |   |
| Comprehensive  loss                       |       | $                                                   | (6,616,095 | )                                             | $          | (2,669,241 | ) | $ | (14,985,122 | ) | $ | (12,001,937 | ) |
|                                           |            |                                                     |            |                                               |            |  |  |  |  |  |  |  |  |  |  |

 

 

6

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**(3) NetLoss Per Share**

We calculate netloss per share in accordance with SFAS No. 128,*Earnings Per Share*.  Basic net loss per share iscomputed by dividing net loss by the weighted-average number of shares ofcommon stock outstanding during the periods presented.  Diluted net lossper share is computed by dividing net loss by the weighted-average number ofshares of common stock outstanding increased to include potentially dilutivecommon stock equivalents outstanding during the period.  For the three-and nine-month periods ended September 30, 2007 and 2006, there is nodifference between basic and diluted net loss per share attributable to commonstockholders because the effect of common stock equivalents outstanding duringthe periods, including stock options, restricted stock units, warrants andredeemable convertible preferred stock, is antidilutive.

**(4) Eisai Co., Ltd. Agreement**

In September 2007we announced that Eisai Co., Ltd. (“Eisai”) elected to extend the term of theCooperation Agreement between TorreyPines and Eisai dated October 1, 2005 foran additional twelve months pursuant to the terms of the agreement.  Under the terms of the agreement and inconnection with the extension, we received an upfront payment in October 2007and will continue to receive research funding in support of the program for anadditional year.

**(5) CommonStock Warrant Liability**

During the quarter ended June 30, 2007, we obtained letters from theholders of warrants issued in connection with the Merger clarifying the warrantagreement provisions to allow for settlement of these warrants with theissuance of unregistered shares and to further clarify that a net cashsettlement is prohibited.  Prior toobtaining the clarification letters, the provisions of the warrant agreementrequired liability treatment for these instruments under Emerging Issues TaskForce Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexedto, and Potentially Settled in, a Company’s Own Stock.”  On each of the effective dates of theseclarification letters (for which we received no additional consideration), theaggregate fair value of $3,922,288 for these warrants, as calculated using theBlack-Scholes model, was reclassified from current liabilities to additionalpaid-in capital and a warrant valuation adjustment of $208,712 was recorded asother income on the accompanying consolidated statement of operations.  As of September 30, 2007, the common stockwarrant liability was $0.

**(6) Commitmentsand Contingencies**

Several lawsuitswere filed against us in February 2005 in the U.S. District Court for theSouthern District of New York asserting claims under Sections 10(b) and20(a) of the Securities Exchange Act of 1934, as amended, or the ExchangeAct and Rule 10b-5 thereunder on behalf of a class of purchasers of Axonyxcommon stock during the period from June 26, 2003, through and includingFebruary 4, 2005, referred to as the class period. Dr. Marvin S.Hausman, M.D., a former director and our former Chief Executive Officer, andDr. Gosse B. Bruinsma, M.D., also a former Chief Executive Officer,were also named as defendants in the lawsuits. These actions were consolidatedinto a single class action lawsuit in January 2006. On April 10,2006, the class action plaintiffs filed an amended consolidated complaint. TheCompany filed its answer to that complaint on May 26, 2006. The Company’smotion to dismiss the consolidated amended complaint was filed on May 26,2006 and was submitted to the court for a decision in September 2006. Themotion to dismiss is pending.

The class actionplaintiffs allege generally that the Company’s Phase III phenserine developmentprogram was subject to alleged errors of design and execution which resulted inthe failure of the first Phase III phenserine trial to show efficacy. Plaintiffsallege the defendants’ failure to disclose the alleged defects resulted in theartificial inflation of the price of the Company’s shares during the classperiod.

There is also ashareholder derivative suit pending in New York Supreme Court, New York County,against our former directors and officers and one of our current directors. Thenamed defendants are Marvin S. Hausman, M.D., Gosse B.Bruinsma, M.D., S. Colin Neill, Louis G. Cornacchia, Steven H.Ferris, Ph.D., Gerard J. Vlak, Ralph Snyderman, M.D. and MichaelA. Griffith. Defendants are alleged to have breached their duties to theCompany and misused inside information regarding clinical trials of phenserine.This action has been stayed pending further developments in the federal classaction.

The complaintsseek unspecified damages. Management believes the claims are without merit andplans to defend the claims vigorously. The Company has determined that a lossin connection with these matters is possible, but not probable. Accordingly,the Company has not recorded any liability relating to these matters.

 

7

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**(7) IncomeTaxes**

EffectiveJanuary 1, 2007, the Company adopted the provisions of FinancialAccounting Standards Board (“FASB”) Interpretation No. 48, * Accounting forUncertainty in Income Taxes — an Interpretation of FASB Statement No. 109*(“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attributecriteria for the financial statement recognition and measurement of taxpositions taken or expected to be taken in a tax return. For those benefits tobe recognized, a tax position must be more-likely-than-not to be sustained uponexamination by taxing authorities.

The Company hasunrecognized tax benefits of approximately $711,000 which did not changesignificantly during the nine months ended September 30, 2007. The applicationof FIN 48 would have resulted in a charge to retained earnings of $603,000,except that the charge was fully offset by the application of a valuationallowance. In addition, future changes in the unrecognized tax benefits willhave no impact on the effective tax rate due to the existence of the valuationallowance.

As of the date ofadoption of FIN 48, no interest or penalties associated with any unrecognized taxbenefits were accrued, nor was any interest expense recognized during thequarter. The Company’s policy is to record interest and penalties related totax positions in income tax expense.

The Company issubject to taxation in the United States and various states and foreignjurisdictions. The Company’s tax years for 2000 and forward are subject toexamination by the United States and various state taxing authorities due tothe carryforward of unutilized net operating losses and credits. Tax years 2004and forward remain open to examination by foreign taxing jurisdictions.

 

8

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

*Thisdiscussion and analysis should be read in conjunction with our unauditedfinancial statements and notes included in this Quarterly Report on Form 10-Qand the audited financial statements and notes as of and for the year ended December 31,2006 included with our Annual Report on Form 10-K filed with the Securities andExchange Commission, or SEC, on March 29, 2007. Operating results are notnecessarily indicative of results that may occur in future periods.*

*Thefollowing discussion of our financial condition contains certain statementsthat are not strictly historical and are “forward-looking” statements withinthe meaning of the Private Securities Litigation Reform Act of 1995 and involvea high degree of risk and uncertainty. Our actual results may differ materiallyfrom those projected in the forward-looking statements due to risks anduncertainties that exist in our operations, development efforts and businessenvironment, including those set forth under the Section entitled “RiskFactors” in Part II, Item 1A, and other documents we file with the SEC. Allforward-looking statements included in this report are based on informationavailable to us as of the date hereof, and, unless required by law, we assumeno obligation to update any such forward-looking statement.*

**Overview**

***Company Overview***

We are abiopharmaceutical company committed to the discovery, development andcommercialization of novel small molecules to treat diseases and disorders ofthe central nervous system, or CNS. Our therapeutic focus is in two areas:chronic pain, including migraine and neuropathic pain; and cognitive disorders,including cognitive impairment associated with schizophrenia and Alzheimer’sdisease. Through our in-house discovery programs and strategic in-licensing, wehave built a robust pipeline of seven product candidates for these indications.

We currently have twoproduct candidates in clinical development for chronic pain. We announced inOctober 2007 that tezampanel, our lead product candidate for chronic pain, metthe primary endpoint in a Phase IIb clinical trial. This clinical trialevaluated the use of tezampanel for the abortive treatment of migraine. We arecurrently conducting a Phase I clinical trial for our follow-on productcandidate for chronic pain, NGX426.

We currently have oneproduct candidate in clinical development for cognitive disorders. NGX267 isour lead product candidate for the treatment of cognitive impairment associatedwith schizophrenia, or CIAS. We have completed three Phase I clinical trials ofNGX267. We expect that NGX267 would be used for the treatment of CIAS asco-therapy to current antipsychotic therapy to treat schizophrenia. Inaddition, we intend to initiate a small Phase II trial of NGX267 as a potentialtreatment for dry mouth, or xerostomia, secondary to Sjogren’s Syndrome, and wemay also evaluate NGX267 for the potential treatment of Alzheimer’s disease.

We also have four productcandidates in development focused on cognitive disorders: Posiphen® , NGX292, bisnorcymserine and NGX555.  Two Phase I clinical trials have beencompleted for Posiphen. NGX292, bisnorcymserine and NGX555 are currently inpreclinical development. In addition, we have two drug discovery programsfocused on discovering and validating small molecules and novel moleculartargets for Alzheimer’s disease, and we are conducting both programs incollaboration with Eisai Co., Ltd., or Eisai, a leader in Alzheimer’s diseaseresearch.

***Recent Developments***

In October 2007, we announced that the 40 mg dose of tezampanel demonstratedstatistically significant improvement on headache pain response, the primaryendpoint, at two hours post-dose compared to placebo in a 306-patient, PhaseIIb clinical trial for the treatment of a single, acute migraine attack. Twoother doses of tezampanel, 70 mg and 100 mg, were evaluated and alsodemonstrated effects across a number of pain measurements although neither dosereached statistical significance on the primary endpoint. Although not poweredto demonstrate statistical significance, improvement in key secondary measuresat 40 mg were either statistically significant or trending when compared toplacebo and corroborated the results for the primary endpoint of thestudy.  We intend to submit the data fromthis trial to the U. S. Food and Drug Administration, or FDA, in order toinitiate a Phase III program in acute migraine in the second half of 2008.

In October 2007, wecompleted the evaluation of NGX426 through the 90 mg dose of our on-going PhaseI maximum tolerated, single dose study. We have not reached the maximum tolerated dose of NGX426 and thereforewill need to submit an amendment to the FDA to modify the current protocol inorder to continue dosing above 90 mg.

 

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In September 2007we announced that Eisai elected to extend the term of the October 2005Cooperation Agreement between us and Eisai for an additional twelve monthspursuant to the terms of the agreement. Under the terms of the agreement and inconnection with the extension, we received an upfront payment in October 2007and will continue to receive research funding in support of the program for anadditional year.

***Financial Overview***

We have incurred netlosses since inception as we have devoted substantially all of our resources toresearch and development, including early-stage clinical trials. As ofSeptember 30, 2007, our accumulated deficit was $88.2 million. We expect toincur substantial and increasing losses for the next several years as wecontinue to expend resources seeking to successfully research, develop,manufacture, obtain regulatory approval for, and market and sell our productcandidates. We expect that in the near term, we will incur substantial lossesrelating primarily to costs and expenses in our efforts to advance thedevelopment of tezampanel, NGX426, and NGX267.

We have not generated anyrevenue from product sales since inception and do not expect to generate anyrevenue from product sales for the next several years. Because our productcandidates are at an early stage of clinical and preclinical development andthe outcome of these efforts is uncertain, we cannot estimate the actualamounts necessary to successfully complete the development andcommercialization of our product candidates or whether, or when, we may achieveprofitability.

*Revenue*

All of our revenueto date has been derived from license and option fees and research funding fromour strategic alliance agreements. We will continue to seek partners for someor all of our product candidates and discovery programs. In the future, we willseek to generate revenue from some or all of the following sources:

•      license and option fees from partners;

•      research funding from partners;

•      milestone payments from partners;

•      royalty payments from partners; and

•      product sales.

We expect that anyrevenue we generate will fluctuate from quarter to quarter as a result of thetiming and amount of payments received under our strategic alliance agreements,and the amount and timing of payments we receive upon the sale of our products,to the extent any are successfully commercialized. If we fail to complete thedevelopment of our product candidates in a timely manner or obtain regulatoryapproval, our ability to generate future revenue, and our financial conditionand results of operations, would be materially adversely affected.

*Research and Development Expense*

Since inception,we have focused on discovery and development of novel small molecules to treatCNS diseases and disorders. We currently have four compounds with openInvestigational New Drug applications, or INDs, three of which are in clinicaltrials:

•      Tezampanel, for the treatment ofmigraine, which has been studied in two Phase I clinical trials, five Phase IIaand a Phase IIb clinical trial;

•      NGX426, for the treatment of migraine, whichhas been studied in one Phase I clinical trial and for which we began aPhase I clinical trial in February 2007;

•      NGX267, for the treatment of CIAS, whichhas been studied in two Phase I single dose clinical trials and one Phase Imultiple dose clinical trial; and

•      Posiphen, for the treatment of Alzheimer’sdisease, which has been studied in two Phase I clinical trials.

We expenseresearch and development costs as incurred. Research and development expenseconsists of expenses incurred in identifying, researching, developing andtesting product candidates. These expenses primarily consist of the following:

•      compensation of personnel associated withresearch and development activities, including consultants;

 

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•      fees paid to contract researchorganizations and professional service providers for independent monitoring,analysis and regulatory services for our clinical trials;

•      laboratory supplies and materials;

•      manufacturing of product candidates for usein our preclinical testing and clinical trials;

•      preclinical studies;

•      depreciation of equipment; and

•      allocated costs of facilities andinfrastructure.

Because of therisks inherent in research and development, we cannot reasonably estimate orknow the nature, timing and estimated costs of the efforts necessary tocomplete the development of our programs, the anticipated completion dates ofthese programs, or the period in which material net cash inflows are expectedto commence, if at all, from the programs described above and any potentialfuture product candidates. If either we or any of our partners fail to completeany stage of the development of any potential products in a timely manner, itcould have a material adverse effect on our operations, financial position andliquidity.

*Generaland Administrative Expense*

General andadministrative expense consists primarily of salaries and other related costsfor personnel in executive, finance, accounting, business development,information technology and human resource functions. Other costs includefacility costs not otherwise included in research and development expense andprofessional fees for legal and accounting services.

**Critical Accounting Policies andEstimates**

Our discussion andanalysis of our financial condition and results of operations are based on ourfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States, or GAAP. The preparation ofthese financial statements requires us to make estimates and judgments thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenue and expenses during the reporting periods. Wereview our estimates on an ongoing basis, including those related to revenue,accrued expenses and stock-based compensation. We base our estimates onhistorical experience, known trends and events, and various other factors thatwe believe to be reasonable under the circumstances, the results of which formour basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

Our managementbelieves the following accounting policies and estimates are most critical toaid you in understanding and evaluating our reported financial results.

***Revenue Recognition***

We recognizerevenue in accordance with the SEC’s Staff Accounting Bulletin, or SAB,No. 104,*Revenue Recognition*,and Emerging Issues Task Force, or EITF, No. 00-21,*Revenue Arrangements with Multiple Deliverables*.To date we have recorded license and option fee revenue and research fundingrevenue from four research agreements with Eisai. The terms of the agreementstypically include up-front payments to us of non-refundable license and/oroption fees and, in some cases, payments for research efforts. Futureagreements could also include milestone payments and royalty payments.

We recognizerevenue from up-front non-refundable license and option fees on a straight-linebasis over the contracted or estimated period of performance, which istypically the research term. Amounts received for research funding for aspecific number of full-time researchers are recognized as revenue as theservices are provided, as long as the amounts received are not refundableregardless of the results of the research project. Milestone payments, if any,will be recognized on achievement of the milestone, unless the amounts receivedare creditable against royalties or we have ongoing performance obligations.Royalty payments, if any, will be recognized on sale of the related product,provided the royalty amounts are fixed and determinable, and collection of therelated receivable is probable.

 

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***Accrued Expenses***

As part of theprocess of preparing financial statements, we are required to estimate accruedexpenses. This process involves identifying services which have been performedon our behalf, and estimating the level of service performed and the associatedcost incurred for such service as of each balance sheet date in our financialstatements. Examples of services for which we must estimate accrued expensesinclude contract service fees paid to contract manufacturers in conjunctionwith the production of clinical drug supplies and to contract researchorganizations in connection with preclinical studies and clinical trials. Inconnection with such service fees, our estimates are most affected by ourunderstanding of the status and timing of services provided. The majority ofour service providers invoice us in arrears for services performed. In theevent that we do not identify certain costs which have been incurred, or weunder- or over-estimate the level of services performed or the costs of suchservices in a given period, our reported expenses for such period would be toolow or too high. The date on which certain services commence, the level ofservices performed on or before a given date, and the cost of such services areoften determined based on subjective judgments. We make these judgments basedupon the facts and circumstances known to us. To date, we have been able toreasonably estimate these costs; however, as we increase the level of servicesperformed on our behalf, it will become increasingly more difficult for us toestimate these costs, which could result in our reported expenses for futureperiods being too high or too low.

***Stock-BasedCompensation***

We estimate thefair value of stock options and non-performance based restricted stock unitsgranted using the Black-Scholes option valuation model and the fair value ofperformance based restricted stock units granted using a Monte-Carlo simulationoption-pricing model. The fair values of stock option and restricted stock unitawards are amortized over the requisite service periods of the awards. Both theBlack-Scholes option valuation model and the Monte-Carlo simulationoption-pricing model require the input of highly subjective assumptions,including the option or restricted stock unit’s expected life, price volatilityof the underlying stock, risk free interest rate and expected dividend rate. Asstock-based compensation expense related to stock options is based on awardsultimately expected to vest, the stock-based compensation expense has beenreduced for estimated forfeitures of stock options. Statement of FinancialAccounting Standards, or SFAS, No. 123R,*Share-Based Payment*, requires forfeitures to be estimated at thetime of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. Stock option forfeitures wereestimated based on historical experience. We may elect to use differentassumptions under both the Black-Scholes option valuation model or theMonte-Carlo simulation option-pricing model in the future, which couldmaterially affect our net income or loss and net income or loss per share.

**RecentlyIssued Accounting Pronouncements**

In September 2006, the FASB issued SFASNo. 157, *Fair Value Measurements*,which provides a single definition of fair value, a framework for measuringfair value, and expanded disclosures concerning fair value. This pronouncementis effective for fiscal years beginning after November 15, 2007. TheCompany is evaluating the impact of the adoption of SFAS No. 157 will haveon its consolidated financial statements.

In February 2007,the FASB issued SFAS No. 159,*The FairValue Option for Financial Assets and Financial Liabilities—Including anAmendment of FASB Statement No. 115.*  This standard permits an entity to choose tomeasure many financial instruments and certain other items at fair value. Mostof the provisions in SFAS No. 159 are elective; however, the amendment toSFAS No. 115,*Accounting for CertainInvestments in Debt and Equity Securities,* applies to all entitieswith available-for-sale and trading securities. The fair value optionestablished by SFAS No. 159 permits all entities to choose to measureeligible items at fair value at specified election dates. A business entitywill report unrealized gains and losses on items for which the fair valueoption has been elected in earnings (or another performance indicator if thebusiness entity does not report earnings) at each subsequent reporting date.The fair value option: (a) may be applied instrument by instrument, with afew exceptions, such as investments otherwise accounted for by the equitymethod; (b) is irrevocable (unless a new election date occurs); and(c) is applied only to entire instruments and not to portions ofinstruments. SFAS No. 159 is effective as of the beginning of an entity’sfirst fiscal year that begins after November 15, 2007. The Company is evaluatingthe impact the adoption of SFAS No. 159 will have on its consolidatedfinancial statements.

**Resultsof Operations**

***Fluctuations in Operating Results***

Our results of operationshave fluctuated significantly from period to period in the past and are likelyto continue to do so in the future. We anticipate that our quarterly and annualresults of operations will be affected for the foreseeable future by

 

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several factors,including the timing and amount of payments received pursuant to our currentresearch agreements and future strategic alliance agreements, as well as theprogress and timing of expenditures related to our development and discoveryefforts.  Due to these fluctuations, we believe that the period-to-periodcomparisons of our operating results are not a good indication of our futureperformance.

***Comparison of the Three Months Ended September 30, 2007 and2006***

The following tablesummarizes the significant components of our results of operations for thethree months ended September 30, 2007 and 2006, in thousands, together with thechange in such items in dollars and as a percentage.

| ** **                          | ** ** | **For the Three Months Ended September 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                                              | ** ** | **2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Revenue                             |       | $                                                                     | 2,463      |   | $ | 2,463 |   | $ | 0 |   | 0 | % |
| Research and  development expense   |       | 8,161                                                                 |       | 4,470 |   | 3,691 |   | 83 | % |
| General and  administrative expense |       | 1,351                                                                 |       | 680 |   | 671 |   | 99 | % |
| Interest income                     |       | 504                                                                   |       | 259 |   | 245 |   | 95 | % |
| Interest expense                    |       | 193                                                                   |       | 279 |   | (86 | ) | (31 | )% |
|                                     |            |                                                                       |            |  |  |  |  |  |  |  |  |  |

*Revenue.  * Revenue for the three months endedSeptember 30, 2007 was unchanged from the same period in 2006.  There wereno current quarter changes in our strategic alliance agreements that affectedour revenue from license and option fees or research funding.

*Researchand development expense.  * Research and development expense increased to $8.2million for the three months ended September 30, 2007 from $4.5 million for thesame period in 2006. The $3.7 million increase was primarily attributable to anincrease in development expense which was due to an increase in spending forthe development of  tezampanel, NGX426and NGX267 in the three months ended September 30, 2007 compared to the sameperiod in 2006.

*Generaland administrative expense.  *General and administrative expenseincreased to $1.4 million for the three months ended September 30, 2007 from$0.7 million for the same period in 2006. The increase was attributable to increased personnel costs and relatedexpenses resulting from an increase in the average number of general andadministrative employees during the third quarter of 2007 compared to the sameperiod of 2006.  There was also anincrease in stock compensation expense during the three months ended September30, 2007 compared to the same period in 2006. Finally, there was an increase in professional services costs, includingincreased audit costs, and increased insurance costs during the three monthsended September 30, 2007 compared to the same period in 2006.

*Interestincome.  *Interest income increased to $504,000 for the three months ended September 30,2007 from $259,000 for the same period in 2006. The increase of $245,000 wasdue to a higher average cash and cash equivalents balance during the thirdquarter of 2007 compared to the third quarter of 2006.

*Interestexpense.  *Interest expense decreased to $193,000 for the three months ended September 30,2007 from $279,000 for the same period in 2006. The $86,000 decrease isattributable to a lower average debt balance during the third quarter of 2007compared to the third quarter of 2006.

***Comparison of the Nine Months Ended September 30, 2007 and2006***

The following tablesummarizes the significant components of our results of operations for the ninemonths ended September 30, 2007 and 2006, in thousands, together with thechange in such items in dollars and as a percentage.

| ** **                          | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                                        | ** ** | **2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Revenue                             |       | $                                                               | 7,388      |   | $ | 7,388 |   | $ | 0 |   | 0 | % |
| Research and  development expense   |       | 20,390                                                          |       | 17,640 |   | 2,750 |   | 16 | % |
| General and  administrative expense |       | 4,209                                                           |       | 1,986 |   | 2,223 |   | 112 | % |
| Interest income                     |       | 1,699                                                           |       | 732 |   | 967 |   | 132 | % |
| Interest expense                    |       | 647                                                             |       | 735 |   | (88 | ) | (12 | )% |
|                                     |            |                                                                 |            |  |  |  |  |  |  |  |  |  |

*Revenue.  * Revenue for the nine months endedSeptember 30, 2007 was unchanged from the same period in 2006.  There wereno current quarter changes in our strategic alliance agreements from period toperiod that affected our revenue from license and option fees or researchfunding.

 

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*Researchand development expense.  * Research and development expense increased to $20.4million for the nine months ended September 30, 2007 from $17.6 million for thesame period in 2006. The $2.8 million increase was attributable to an increasein development expense of $4.5 million, offset by a decrease in researchexpense of $1.7 million.

The $4.5 million increasein development expense was due to our ongoing clinical trials. During the ninemonths ended September 30, 2007 we had one Phase IIb trial and three Phase Itrials in process during the period compared to three Phase I trials during thesame period in 2006.  Also, during thenine months ended September 30, 2007 activities to support the continueddevelopment of tezampanel increased over the same period of 2006.  The increase in clinical trial activity ispartially offset by a decrease in license costs.  During the nine months ended September 30,2007 we did not achieve any milestones that obligated us to make payments underany of our license agreements.  Duringthe nine months ended September 30, 2006 we did achieve certain milestones andtherefore were obligated to make certain payments under our agreement with LifeScience Research Israel.

The $1.7 million decreasein research expense was primarily due to lower costs incurred under a researchagreement with Eisai.  Specifically, lower usage of certain lab suppliesaccounted for most of the decrease.  Additionally, there was a decrease inpersonnel costs and related expenses resulting from a decrease in the averagenumber of research employees during the nine months ended September 30, 2007compared to the same period in 2006. These decreases were partially offset by an increase in stock compensationexpense for the nine months ended September 30, 2007 compared to the sameperiod in 2006.

*Generaland administrative expense.  *General and administrative expenseincreased to $4.2 million for the nine months ended September 30, 2007 from$2.0 million for the same period in 2006. The $2.2 million increase wasattributable to increased personnel costs and related expenses for the firstnine months of 2007 compared to the same period in 2006 resulting from anincrease in the average number of general and administrative employees during2007 compared to 2006.  Additionally, forthe nine months ended September 30, 2007 stock compensation expense increasedfor the nine months ended September 30, 2007 compared to the same period of2006.  Finally, there was an increase inprofessional services costs, including increased audit and legal costs, for thenine months ended September 30, 2007 compared to the same period in 2006.

*Interestincome.  *Interest income increased to $1.7 million for the nine months ended September30, 2007 from $0.7 million for the same period in 2006. The increase of $1.0million was due to an increase in the average cash and cash equivalents balanceduring the first nine months of 2007 compared to the same period in 2006.

*Interestexpense.  *Interest expense decreased to $647,000 for the nine months ended September 30,2007 from $735,000 for the same period in 2006. The $88,000 decrease isattributable to a lower average debt balance during the first nine months of2007 compared to the same period in 2006.

**Liquidityand Capital Resources**

Since inception we havefunded our operations primarily through sales of our equity securities,payments under our research agreements, debt financings and interestincome.  Through September 30, 2007, we had received approximately $67.5million in net proceeds from the sale of equity securities, $41.1 million inpayments under our research agreements, $18.7 million from debt issuances, and$5.0 million in interest income.  In addition, we received $46.5 millionof cash in connection with the Merger in October 2006.

At September 30, 2007, wehad cash and cash equivalents of $39.7 million as compared to$55.4 million at December 31, 2006. The cash balance at September 30,2007 is $15.7 million lower than the balance at December 31, 2006 duelargely to the current period operating loss, repayments of debt and capitalequipment purchases, offset by proceeds from license and option fee paymentsand research funding payments.

We believe we havesufficient funds to enable us to meet our ongoing working capital requirementsthrough at least December 31, 2008.  For a further discussion of therisks related to the availability of cash to fund our future operations, pleasesee “Risk Factors.”

We expect to continue tofund our operations with existing cash resources that were primarily generatedfrom equity financings, cash payments under our research agreements, and debtfinancing arrangements until we can generate significant cash from ouroperations. In addition, we may finance future cash needs through the sale ofequity securities, entering into

 

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strategic collaborationagreements and debt financing. However, we may not be successful in enteringinto strategic collaboration agreements, or in receiving research funding undercurrent agreements or milestone or royalty payments under future agreements. Inaddition, we cannot be sure that our existing funds will be adequate or thatadditional financing will be available when needed or that, if available, financingwill be obtained on terms favorable to us or our stockholders. Havinginsufficient funds may require us to delay, scale back or eliminate some or allof our research or development programs or to relinquish greater or all rightsto product candidates at an earlier stage of development or on less favorableterms than we would otherwise choose. Failure to obtain adequate financing alsomay adversely affect our ability to operate as a going concern.

If we raise additionalcapital by issuing equity securities, our existing stockholders’ ownership willbe diluted. Any debt financing we enter into may involve covenants thatrestrict our operations. These restrictive covenants may include limitations onadditional borrowing, specific restrictions on the use of our assets as well asprohibitions on our ability to create liens, pay dividends, redeem our stock ormake investments. In addition, if we raise additional funds throughcollaboration and licensing arrangements, we may be required to relinquishpotentially valuable rights to our product candidates or proprietarytechnologies, or grant licenses on terms that are not favorable to us.

**Off-BalanceSheet Arrangements**

We do not have anyoff-balance sheet arrangements.

**Item3. Quantitative and Qualitative Disclosures About Market Risk**

We are exposed to marketrisk related to changes in interest rates. Our current investment policy is tomaintain an investment portfolio consisting mainly of U.S. money market andhigh-grade corporate securities, directly or through managed funds, withmaturities of one and a half years or less. We do not enter into investmentsfor trading or speculative purposes. Our cash is deposited in and investedthrough highly rated financial institutions in North America. Our marketablesecurities are subject to interest rate risk and will fall in value if marketinterest rates increase. If market interest rates were to increase immediatelyand uniformly by 10% from levels at September 30, 2007 and 2006, we estimatethat the fair value of our investment portfolio would decline by an immaterialamount. We have the ability to hold our fixed income investments until maturitytherefore we would not expect our operating results or cash flows to beaffected to any significant degree by the effect of a change in market interestrates on its investments.

We have foreign currencyaccounts that are exposed to currency exchange risk. The functional currency ofour European subsidiary, which is based in Belgium, is the local currency.Accordingly, the accounts of this subsidiary are translated from the localcurrency to the U.S. dollar using the current exchange rate at the balancesheet date for the balance sheet accounts, and using the average exchange rateduring the period for revenue and expense accounts. The effects of translationare recorded in accumulated other comprehensive loss as a separate component ofstockholders’ deficit. Because we did not have any transactions denominated inforeign currencies during the three months ended September 30, 2007 and 2006,we did not record exchange gains and losses in operations for those periods. Ifthe foreign currency rates were to fluctuate by 10% from exchange rates atSeptember 30, 2007 and 2006, the effect on our financial statements would notbe material. However, there can be no assurance there will be not be a materialimpact in the future.

**Item4. Controls and Procedures**

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our Exchange Act reports is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including our principal executive officer and principal financialofficer, as appropriate, to allow timely decisions regarding requireddisclosure.

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of ourdisclosure controls and procedures, as such term is defined underRule 13a- 15 (e)promulgated under the Exchange Act. Based onthis evaluation, our principal executive officer and our principal financialofficer concluded that our disclosure controls and procedures were designed andoperating effectively as of the end of the period covered by this QuarterlyReport on Form 10-Q.

Our management, includingour principal executive officer and our principal financial officer, does notexpect that our disclosure controls and procedures or our internal controlswill prevent all errors and all fraud. A control system, no matter

 

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how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the company have been detected.

**Changes in Internal Control OverFinancial Reporting**

There has been no changein our internal control over financial reporting during the quarter endedSeptember 30, 2007 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

**PARTII. OTHER INFORMATION**

**Item1. Legal Proceedings**

Several lawsuits werefiled against us in February 2005 in the U.S. District Court for theSouthern District of New York asserting claims under Sections 10(b) and20(a) of the Securities Exchange Act of 1934, as amended, or the ExchangeAct and Rule 10b-5 thereunder on behalf of a class of purchasers of ourcommon stock during the period from June 26, 2003, through and includingFebruary 4, 2005, referred to as the class period. Dr. Marvin S.Hausman, M.D., a former director and our former Chief Executive Officer, andDr. Gosse B. Bruinsma, M.D., also a former Chief Executive Officer,were also named as defendants in the lawsuits. These actions were consolidatedinto a single class action lawsuit in January 2006. On April 10,2006, the class action plaintiffs filed an amended consolidated complaint. Wefiled our answer to that complaint on May 26, 2006. Our motion to dismissthe consolidated amended complaint was filed on May 26, 2006 and wassubmitted to the court for a decision in September 2006. The motion todismiss is pending.

The class actionplaintiffs allege generally that our Phase III phenserine development programwas subject to alleged errors of design and execution which resulted in thefailure of the first Phase III phenserine trial to show efficacy. Plaintiffsallege the defendants’ failure to disclose the alleged defects resulted in theartificial inflation of the price of our shares during the class period.

There is also ashareholder derivative suit pending in New York Supreme Court, New York County,against our former directors and officers and one of our current directors. Thenamed defendants are Marvin S. Hausman, M.D., Gosse B.Bruinsma, M.D., S. Colin Neill, Louis G. Cornacchia, Steven H. Ferris, Ph.D.,Gerard J. Vlak, Ralph Snyderman, M.D. and Michael A. Griffith.Defendants are alleged to have breached their duties to the company and misusedinside information regarding clinical trials of phenserine. This action hasbeen stayed pending further developments in the federal class action.

The complaints seekunspecified damages. We believe the complaints are without merit and we intendto defend these lawsuits vigorously. However, we cannot make assurances that wewill prevail in these actions, and, if the outcome is unfavorable to us, ourreputation, operations and share price could be adversely affected.

 

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**Item 1A.Risk Factors**

*Youshould consider carefully the following information about the risks describedbelow, together with the other information contained in this quarterly reporton Form 10-Q and in our other filings with the Securities and ExchangeCommission, before you decide to buy or maintain an investment in our commonstock. We believe the risks described below are the risks that are material tous as of the date of this quarterly report. If any of the following risksactually occur, our business financial condition, results of operations andfuture growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, andyou may lose all or part of the money you paid to buy our common stock. The risk factors set forth below with an asterisk (*) next to the title are newrisk factors or risk factors containing changes, including any material changesfrom the risk factors set forth in our annual report on Form 10-K for thefiscal year ended December 31, 2006, as filed with the Securities and ExchangeCommission.*

**Risks Related to Our Business**

****We expect tocontinue to incur net operating losses for the next several years and may neverachieve profitability.***

We have incurred netoperating losses every year since our inception. As of September 30, 2007, wehad an accumulated deficit of approximately $88.2 million. Over the nextseveral years we expect a significant increase in our operating losses as weconduct additional discovery, development, clinical testing and regulatorycompliance activities. All of our revenue to date has been payments received inconnection with our collaboration and licensing agreements. We cannot becertain that we will generate additional revenue through licensing activitiesor that we will receive any of the milestone or royalty payments associatedwith our current collaboration and licensing agreements. Given the risksassociated with discovery, development, clinical testing, manufacturing andmarketing of drug products, we may never be successful in commercializing adrug product that will enable us to be profitable. Our ability to generatesignificant continuing revenue depends on a number of factors, including:

•    successful completion of ongoing andfuture clinical trials for our product candidates;

•    achievement of regulatory approval forour product candidates;

•    successful completion of current andfuture strategic collaborations; and

•    successful manufacturing, sales,distribution and marketing of our products.

We do not anticipate thatwe will generate significant continuing revenue for several years. Even if wedo achieve profitability, we may not be able to sustain or increaseprofitability.

****All of our product candidates are at an early stage ofdevelopment and only a portion of these are in clinical development. We cannotbe certain that any of our product candidates will be successfully developed,receive regulatory approval, or be commercialized.***

Our product candidatesare at an early stage of development and we do not have any products that arecommercially available. Our product candidates, tezampanel and NGX426 formigraine, and NGX267 for CIAS are currently in clinical development. Ourproduct candidates Posiphen, NGX292, bisnorcymserine, or BNC, and NGX555 are inpreclinical development. We will need to perform additional development workand conduct further clinical trials for all of our product candidates before wecan seek the regulatory approvals necessary to begin commercial sales.

Success in preclinicaltesting and early clinical trials does not mean that later clinical trials willbe successful. Companies frequently suffer significant setbacks in later stageclinical trials, even after earlier clinical trials have shown promisingresults. In future clinical trials with larger or somewhat differentpopulations, results from early clinical trials may not be reproduced andanalysis of new or additional data may not demonstrate sufficient safety andefficacy to support regulatory approval of a product candidate.

Additionally, preclinicaltesting and clinical trials are expensive, can take many years, and have anuncertain outcome. Product candidates may not be successful in clinical trialsfor a number of reasons, including, but not limited to, the failure of

 

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a product candidate to besafe and efficacious, the results of later stage clinical trials not confirmingearlier clinical results, or clinical trial results not being acceptable to theUnited States Food and Drug Administration, or FDA, or other regulatoryagencies.

There is no certaintythat the efficacy and safety results of our Phase IIb clinical trial for tezampanel in acutemigraine announced in October 2007 are predictive of results in subsequenttrials of tezampanel or are meaningful indicators of the efficacy oftezampanel.  We will be required toperform additional clinical testing in order to obtain regulatory approval oftezampanel and the results of such additional clinical testing may notreplicate what has been demonstrated to date regarding the efficacy and safetyof tezampanel.   Additionally, further testing oftezampanel may not result in data sufficient to support regulatory approval.

We do not anticipate thatany of our current product candidates will be eligible to receive regulatoryapproval and begin commercialization for a number of years, if at all. Even ifwe were to ultimately receive regulatory approval for one or more of ourproduct candidates, we may be unable to successfully commercialize them for avariety of reasons including:

•    the availability of alternative treatments;

•    the product not being cost effective tomanufacture and sell;

•    limited acceptance in the marketplace;and

•    the effect of competition with othermarketed products.

The success of ourproduct candidates may also be limited by the incidence and severity of anyadverse events or undesirable side effects. Additionally, any regulatoryapproval to market a product may be subject to the imposition by suchregulatory agency of limitations on the indicated uses. These limitations mayreduce the size of the market for the product. If we fail to commercialize oneor more of our current product candidates, our business, results of operations,financial condition, and prospects for future growth will be materially andadversely affected.

***Delays in the commencement or completion of clinical testingof our product candidates could result in increased costs to us and delay ourability to generate significant revenues.***

We cannot predict whetherwe will encounter problems with any of our planned clinical trials that willcause us or regulatory authorities to delay or suspend our clinical trials, ordelay the analysis of data from our ongoing clinical trials. Any of thefollowing factors could delay the clinical development of our productcandidates:

•    ongoing discussions with the FDA orcomparable foreign authorities regarding the scope or design of one or moreclinical trials;

•    delays in receiving, or the inability toobtain, required approvals from institutional review boards or other reviewingentities at clinical trial sites selected for participation in a clinicaltrial;

•    delays or slower than anticipatedenrollment of participants into clinical trials;

•    lower than anticipated retention rate ofparticipants in clinical trials;

•    need to repeat clinical trials as aresult of inconclusive or negative results or unforeseen complications intesting;

•    inadequate supply or deficient quality ofproduct candidate materials or other materials necessary to conduct ourclinical trials;

•    unfavorable FDA inspection and review ofa clinical trial site or records of any clinical or preclinical investigation;

•    serious, unexpected adverse events orundesirable side effects experienced by participants in the clinical trialsthat delay or preclude regulatory approval or limit the commercial use ormarket acceptance if approved;

 

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•    findings that the clinical trialparticipants are being exposed to unacceptable health risks;

•    placement by the FDA of a clinical holdon a clinical trial;

•    restrictions on or post-approvalcommitments with regard to any regulatory approval we ultimately obtain thatrenders a product candidate not commercially viable; and

•    unanticipated cost overruns inpreclinical studies and clinical trials.

In addition, once aclinical trial has started, it may be suspended or terminated by us or the FDAor other regulatory authorities due to a number of factors, including:

•    failure to conduct the clinical trial inaccordance with regulatory requirements;

•    inspection of the clinical trialoperations or clinical trial site by the FDA or other regulatory authoritiesresulting in the imposition of a clinical hold;

•    negative clinical trial results;

•    adverse events or negative side-effectsexperienced by the clinical trial participants; or

•    lack of adequate funding to continue theclinical trial.

We will need to reachagreement with the FDA on the endpoints for some of our Phase III clinicaltrials where endpoints have not been validated and we may work with the FDA topotentially design and validate one or more endpoints. The FDA may not acceptany or all of the endpoints and they may ultimately decide that the endpointsare inadequate to demonstrate the safety and efficacy levels required forregulatory approval. Our failure to adequately demonstrate the safety andefficacy of our product candidates would jeopardize our ability to achieveregulatory approval for, and ultimately to commercialize, the productcandidates.

Clinical trials requiresufficient participant enrollment, which is a function of many factors,including the size of the target population, the nature of the clinical trialprotocol, the proximity of participants to clinical trial sites, theavailability of effective treatments for the relevant disorder or disease, theeligibility criteria for our clinical trials and the number of competingclinical trials. Delays in enrollment can result in increased costs and longerdevelopment times. Failure to enroll participants in our clinical trials coulddelay the completion of the clinical trials beyond current expectations. Inaddition, the FDA could require us to conduct clinical trials with a largernumber of participants than we may project for any of our product candidates.As a result of these factors, we may not be able to enroll a sufficient numberof participants in a timely or cost-effective manner.

Additionally, enrolledparticipants may drop out of clinical trials, which could impair the validityor statistical significance of the clinical trials. A number of factors canlead participants in a clinical trial to discontinue participating in theclinical trial, including, but not limited to: the inclusion of a placebo armin the clinical trial; possible lack of effect of the product candidate beingtested at one or more of the dose levels being tested; adverse side effectsexperienced by the participant, whether or not related to the productcandidate; and the availability of alternative treatment options.

We, the FDA or otherapplicable regulatory authorities may suspend clinical trials of a productcandidate at any time if we or they believe the participants in such clinicaltrials, or in independent third-party clinical trials for product candidatesbased on similar technologies, are being exposed to unacceptable health risksor for other reasons. In addition, it is impossible to predict whetherlegislative changes will be enacted, or whether FDA regulations, guidance orinterpretations will be changed, or what the impact of such changes, if any,may be.

If we experience any suchproblems, we may not have the financial resources to continue development ofthe product candidate that is affected or the development of any of our otherproduct candidates. If we experience significant delays in the commencement orcompletion of clinical testing, financial results and the commercial prospectsfor the product candidates will be harmed and costs will increase.  Additionally, any significant delays in thecommencement or completion of clinical testing will delay our ability togenerate significant revenue.

 

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***We rely on third parties to assist us in conducting clinicaltrials. If these third parties do not successfully carry out their contractualduties or meet expected deadlines, we may not be able to obtain regulatoryapproval for or commercialize our product candidates.***

We rely on, and intend tocontinue to rely on, third parties, such as contract research organizations,medical institutions, clinical investigators and contract laboratories, toconduct clinical trials of our product candidates. Our reliance on these thirdparties for development activities reduces our control over these activities.If these third parties do not successfully carry out their contractual dutiesor obligations or meet expected deadlines, or if the quality or accuracy of theclinical data they obtain is compromised due to the failure to adhere to ourclinical protocols or for other reasons, our clinical trials may be extended,delayed or terminated. If these third parties do not successfully carry outtheir contractual duties or meet expected deadlines, we may be required toreplace them. Although we believe there are a number of third party contractorswe could engage to continue these activities, replacing a third partycontractor may result in a delay of the affected trial. Accordingly, we may notbe able to obtain regulatory approval for or successfully commercialize ourproduct candidates.

***We have licensed rights to product candidates tezampanel andNGX426 from Eli Lilly and Company, or Eli Lilly. Eli Lilly has rights oftermination under the license agreement, which if exercised would adverselyaffect our business.***

In April 2003, weentered into an agreement with Eli Lilly to obtain an exclusive license fromEli Lilly to their AK antagonist assets including tezampanel, as well asNGX426. Pursuant to the license agreement we have obligations to make paymentsto Eli Lilly under the agreement and to use commercially reasonable efforts todevelop and commercialize the product candidates, including achievement ofspecified development events within specified timeframes. Eli Lilly mayterminate the agreement for uncured material breach of the agreement by us,including any breach of our diligence obligations. If Eli Lilly were toterminate the agreement, we would lose rights to the AK antagonist productcandidates, and our business would be adversely affected.

***We have licensed rights to product candidates NGX267 andNGX292 from Life Science Research Israel, or LSRI.  LSRI has rights of termination under thelicense agreement, which if exercised would adversely affect our business.***

In May 2004, weentered into an agreement with LSRI to obtain an exclusive license from LSRI totheir muscarinic agonist assets NGX267 and NGX292. We have obligations to makepayments to LSRI under the agreement and to use commercially reasonable effortsto develop and commercialize the product candidates subject to the agreement,including achievement of specified development events within specifiedtimeframes. LSRI may terminate the agreement for uncured material breach of theagreement by us, including any breach of our diligence obligations. If LSRIwere to terminate the agreement, we would lose rights to the muscarinic agonistproduct candidates, and our business would be adversely affected.

****We depend on Eisai Co. Ltd., or Eisai, for funding for ourgamma-secretase modulator program and Alzheimer’s disease genetics discoveryprogram. Eisai has the first right to obtain rights to gene targets andcompounds resulting from these programs, which could delay or limit our abilityto develop and commercialize these gene targets and compounds.***

In February 2005, weentered into an agreement with Eisai to discover small molecule gamma-secretasemodulator compounds to treat Alzheimer’s disease. The agreement had an initialtwo-year term which Eisai elected to extend for an additional 12 months.In October 2005, we entered into an agreement with Eisai to discover genetargets useful in treating or preventing Alzheimer’s disease in humans. Thisagreement also has a two-year term which Eisai elected to extend for anadditional 12 months. We depend upon Eisai to provide funding for theresearch we conduct under each of these agreements. If Eisai were to ceasefunding these programs for any reason, we would need to provide our own fundingfor the programs, seek a strategic partner for further work on the programs,raise additional funding, or curtail or abandon the programs.

During the term of therespective agreements, Eisai has exclusive first rights of negotiation andrefusal with regard to a license, collaboration or other arrangement regardingcompounds discovered and validated in the course of the gamma-secretasemodulator program or gene targets discovered and validated in the course of theAlzheimer’s disease genetics research program, as applicable. These rights heldby Eisai may delay or limit our ability to enter into a license, collaborationor other arrangement with a third party for any compounds resulting from thegamma-secretase modulator program or gene targets resulting from the Alzheimer’sdisease genetic research program.

 

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***Wehave an agreement providing Johnson & Johnson Development Corporation,or JJDC, the first right to obtain rights to our M1 agonist program, whichcould delay or limit our ability to develop and commercialize these productcandidates.***

We have anagreement with JJDC regarding our research and development work into theeffects of using M1 agonists, such as NGX267 and NGX292, in the treatment ofCNS diseases and disorders. Upon completion of a specified level of developmentof our lead M1 agonist, we are obligated to provide results for the compound toJJDC.

For a specifiedperiod following receipt of the results, or at an earlier time as agreed to byboth parties, JJDC has the exclusive right of first negotiation with usregarding our intellectual property rights or products related to our M1agonist program. These rights held by JJDC may delay or limit our ability toenter into a transaction with a third party for our M1 agonist productcandidates.

***If we fail to enter into and maintain collaborations for ourproduct candidates, we may have to reduce or delay product development orincrease expenditures.***

Our strategy fordeveloping, manufacturing, and commercializing potential products includesestablishing and maintaining collaborations with pharmaceutical andbiotechnology companies to advance some of our programs and share expenditureswith partners on those programs. We may not be able to negotiate futurecollaborations on acceptable terms, if at all. If we are not able to establishand maintain collaborative arrangements, we may have to reduce or delay furtherdevelopment of some programs or undertake the development activities at our ownexpense. If we elect to increase capital expenditures to fund developmentprograms on our own, we will need to obtain additional capital, which may notbe available on acceptable terms or at all. Even if we do succeed in securingsuch collaborations, we may not be able to maintain them if, for example,objectives under the agreement are not met, the agreement is terminated or notrenewed, development or approval of a product candidate is delayed or sales ofan approved drug are disappointing. Furthermore, any delay in entering intocollaborations could delay the development and commercialization of our productcandidates and reduce their competitiveness, even if they reach the market. Anysuch delay related to our collaborations could adversely affect our business.

***If our strategic partners do not devote adequate resourcesto the development and commercialization of our product candidates, we may notbe able to commercialize our products and achieve revenues.***

We may enter intocollaborations with other strategic partners with respect to our productcandidates. If we enter into any such collaborations, we may have limited or nocontrol over the amount and timing of resources that our partners dedicate tothe development of our product candidates. Our ability to commercializeproducts we develop with our partners and generate royalties from product saleswill depend on the partner’s ability to assist us in establishing the safetyand efficacy of our product candidates, obtaining regulatory approvals andachieving market acceptance of products. Our partners may elect to delay orterminate development of a product candidate, independently develop productsthat could compete with our products, or not commit sufficient resources to themarketing and distribution of products under the collaboration. If our partnersfail to perform as expected under the collaborative agreements, our potentialfor revenue from the related product candidates will be dramatically reduced.In addition, revenue from our future collaborations may consist of contingentpayments, such as payments for achieving development and commercializationmilestones and royalties payable on sales of any successfully developed drugs.The milestone, royalty or other revenue that we may receive under thesecollaborations will depend upon both our ability and our partner’s ability tosuccessfully develop, introduce, market and sell new products. In some cases,we will not be involved in these processes and, accordingly, will dependentirely on our partners.

***We will need substantial additional funding and may beunable to raise capital when needed, which would force us to delay, reduce oreliminate our research and development programs or commercialization efforts.***

We will need toraise substantial additional capital in the future and additional fundingrequirements will depend on, and could increase significantly as a result of,many factors, including:

•      the rate of progress and cost of clinicaltrials;

•      the scope of our clinical trials andother discovery and development activities;

•      the prioritization and number of clinicaldevelopment and discovery programs we pursue;

 

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•      the terms and timing of anycollaborative, licensing and other arrangements that we may establish;

•      the costs of filing, prosecuting,defending and enforcing any patent claims and other intellectual propertyrights;

•      the costs and timing of regulatoryapprovals;

•      the costs of goods and manufacturingexpenses; and

•      the costs of establishing or contractingfor sales and marketing capabilities.

We do notanticipate that we will generate significant continuing revenue for severalyears, if at all. Until we can generate significant continuing revenue, ifever, we expect to satisfy our future cash needs through public or privateequity offerings, debt financings or corporate collaboration and licensingarrangements, as well as through interest income earned on cash balances. Wecannot be certain that additional funding will be available on acceptableterms, or at all. If adequate funds are not available, we may be required todelay, reduce the scope of, or eliminate one or more of its research anddevelopment programs or commercialization efforts.

***We do not have internal manufacturing capabilities. If wefail to develop and maintain supply relationships with collaborators or otherthird party manufacturers, we may be unable to develop or commercialize ourproducts.***

Our ability to developand commercialize our products depends in part on our ability to manufacture,or arrange for future collaborators or other third parties to manufacture, ourproducts at a competitive cost, in accordance with regulatory requirements andin sufficient quantities for clinical testing and eventual commercialization.None of our current product candidates have been manufactured on a commercialscale. We and our third-party manufacturers may encounter difficulties with thesmall- and large-scale formulation and manufacturing processes required tomanufacture our product candidates, resulting in delays in clinical trials andregulatory submissions, in the commercialization of product candidates or, ifany product candidate is approved, in the recall or withdrawal of the productfrom the market. Our inability to enter into or maintain agreements withcapable third-party manufacturers on acceptable terms could delay or preventthe commercialization of our products, which would adversely affect our abilityto generate revenue and could prevent us from achieving profitability.

We have sufficientsupplies of tezampanel, NGX426 and NGX267 for our current clinical trials. Wewill need to identify and reach agreement with third parties for the supply ofour product candidates for future clinical trials. We do not have long-termsupply agreements with third parties, and we may not be able to enter intosupply agreements with them in a timely manner or on acceptable terms, if atall. These third parties may also be subject to capacity constraints that wouldcause them to limit the amount of our product candidates they can produce orthe chemicals that we can purchase. Any interruption or delay we experience inthe supply of our product candidates may impede or delay such productcandidates’ clinical development and cause us to incur increased expensesassociated with identifying and qualifying one or more alternate suppliers.

In addition, we,our future collaborators or other third-party manufacturers of our productsmust comply with current Good Manufacturing Practices, or cGMP, requirementsenforced by the FDA through its facilities inspection program. Theserequirements include quality control, quality assurance and the maintenance ofrecords and documentation. In addition, product manufacturing facilities inCalifornia are subject to licensing requirements of the California Departmentof Health Services and may be inspected by the California Department of HealthServices at any time. We, our collaborators or other third-party manufacturersof our products may be unable to comply with these cGMP requirements and withother FDA, state and foreign regulatory requirements. A failure to comply withthese requirements may result in fines and civil penalties, suspension or delayin product approval, product seizure or recall, or withdrawal of productapproval.

***We currently have no marketing or sales staff. If we areunable to enter into or maintain collaborations with marketing partners or ifwe are unable to develop our own sales and marketing capabilities, we may notbe successful in commercializing our potential products and we may be unable togenerate significant revenues.***

We may elect tocommercialize some of the products we are developing on our own, with orwithout a partner, where those products can be effectively marketed and sold inconcentrated markets that do not require a large sales force to be competitive.We currently have no sales, marketing or distribution capabilities. To be ableto commercialize our own products, we will need to establish our ownspecialized sales force and marketing organization with technical expertise and

 

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with supportingdistribution capabilities. Developing such an organization is expensive andtime consuming and could delay or limit our ability to commercialize products.

To commercialize anyproduct candidate that we decide not to market on our own, we will depend on collaborationswith third parties that have established distribution systems and direct salesforces. If we are unable to enter into such collaborations on acceptable terms,we may not be able to successfully commercialize those products.

To the extent that weenter into arrangements with collaborators or other third parties to performsales and marketing services, our product revenue is likely to be lower than ifwe directly marketed and sold our product candidates. If we are unable toestablish adequate sales and marketing capabilities, independently or withothers, we may not be able to generate significant revenue and may not becomeprofitable and the price of our common stock may be negatively affected.

***Tezampanel, NGX426 and NGX555 belong to new classes ofcompounds. There are no compounds in these classes that have receivedregulatory approval for any indication. Therefore, we do not know whether ourproduct candidates will yield commercially viable products or receiveregulatory approval.***

Tezampanel and NGX426 areantagonists of the AK receptors. They are part of a new class of compounds thatblock the AK receptors and, in turn, stop the transmission of pain signals.These product candidates may represent a novel approach to the management ofchronic pain, including migraine and neuropathic pain. There are currently noapproved products for chronic pain that are AK antagonists. As a result, wecannot be certain that our product candidates will result in commerciallyviable drugs that safely and effectively treat chronic pain indications such asmigraine or neuropathic pain.

NGX555, a gamma-secretasemodulator, is a product candidate for Alzheimer’s disease. This productcandidate belongs to a class of compounds that have been studied, or are beingstudied, as a treatment for Alzheimer’s disease, but there are no approvedgamma-secretase modulator products for Alzheimer’s disease. As a result, wecannot be certain that our product candidates will safely and effectivelyimprove the symptoms of Alzheimer’s disease or modify the progression of thedisease or result in commercially viable drugs.

***NGX267and NGX292 are being developed for CIAS, an indication for which there are noproducts approved by the FDA to treat the disorder, and for which no regulatoryprecedents have been established. ******Therefore,we do not know whether our product candidates will yield commercially viableproducts or receive regulatory approval.***

NGX267 and NGX292 aremuscarinic agonists with functionally specific M1 receptor activity that weintend to develop for the treatment of CIAS. There are currently no approvedtherapies for the treatment of CIAS. Therefore, in order to successfullycommercialize our product candidates, we will need to agree with the FDA andother applicable regulatory agencies on clinical trial endpoints regardingsafety and efficacy. Given the lack of current treatments for CIAS, we may beunable to agree on the endpoints or successfully complete clinical trials thatdemonstrate that such endpoints, if agreed to, have been met. Any delay inagreeing to clinical trial endpoints or in achieving those endpoints willprevent us from commercializing our product candidates.

***If our product candidates do not achieve market acceptanceamong physicians, patients, health care payors and the medical community, theywill not be commercially successful and our business will be adverselyaffected.***

The degree of marketacceptance of any of our approved product candidates among physicians,patients, health care payors and the medical community will depend on a numberof factors, including:

•      acceptable evidence of safety andefficacy;

•      relative convenience and ease ofadministration;

•      the prevalence and severity of anyadverse side effects;

•      availability of alternative treatments;

•      pricing and cost effectiveness;

•      effectiveness of sales and marketingstrategies; and

•      ability to obtain sufficient third-partycoverage or reimbursement.

If we are unable toachieve market acceptance for our product candidates, then such productcandidates will not be commercially successful and our business will beadversely affected.

 

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***If our efforts to discover new product candidates do notsucceed, and product candidates that we recommend for clinical development donot actually begin clinical trials, our business will suffer.***

We intend to use ourexpertise in Alzheimer’s disease and related neurodegenerative diseases anddisorders to discover, develop and commercialize new products for the treatmentand prevention of these diseases and disorders. Once advanced into development,a product candidate undergoes drug substance scale up, preclinical testing,including toxicology tests, and formulation development. If this work issuccessful, an IND would need to be prepared, filed, and approved by the FDAand the product candidate would then be ready for human clinical testing.

The process ofdiscovering and conducting preclinical testing on product candidates isexpensive, time-consuming and unpredictable. If we are unable to advance ourproduct candidates to clinical trials our business will be adversely affected.

***If we fail to attract and keep key management and scientificpersonnel, we may be unable to develop or commercialize our product candidatessuccessfully.***

Our successdepends on our continued ability to attract, retain and motivate highlyqualified management and scientific personnel. The loss of the services of anyprincipal member of our senior management could delay or prevent thecommercialization of our product candidates. We employ these individuals on anat-will basis and their employment can be terminated by us or them at any time,for any reason and with or without notice, subject to the terms contained intheir respective employment agreements and offer letters.

Competition forqualified personnel in the biotechnology field is intense. We may not be ableto attract and retain quality personnel on acceptable terms given thecompetition for such personnel among biotechnology, pharmaceutical and othercompanies.

***Companies and universities that have licensed productcandidates to us for research, clinical development and marketing aresophisticated competitors that could develop similar products to compete withour products.***

Licensing ourproduct candidates from other companies, universities or individuals does notalways prevent them from developing non-identical but competitive products fortheir own commercial purposes, nor from pursuing patent protection in areasthat are competitive with us. Our partners who created these product candidatesare experienced scientists and business people who may continue to do researchand development and seek patent protection in the same areas that led to thediscovery of the product candidates that they licensed to us. The developmentand commercialization of successful new drug products from our discoveryprogram is likely to attract additional research by our licensors in additionto other investigators who have experience in developing products for the CNS market.By virtue of the previous research that led to the discovery of the drugs orproduct candidates that they licensed to us, these companies, universities, orindividuals may be able to develop and market competitive products in less timethan might be required to develop a product with which they have no priorexperience.

***Changes in, or interpretations of, accounting rules andregulations could result in unfavorable accounting charges or require us tochange our compensation policies.***

Accounting methodsand policies for biopharmaceutical companies, including policies governingrevenue recognition, expenses, accounting for stock options and in-processresearch and development costs are subject to further review, interpretationand guidance from relevant accounting authorities, including the SEC. Changesto, or interpretations of, accounting methods or policies in the future mayresult in unfavorable accounting charges or may require us to change ourcompensation policies to avoid such charges.

***Our management will be required to devote substantial timeto comply with public company regulations.***

As a publiccompany, we will incur significant legal, accounting and other expenses. Inaddition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well asrules subsequently implemented by the SEC and the Nasdaq Global Market,impose various requirements on public companies, including corporate governancepractices. Our management and other personnel will have to meet theserequirements. Moreover, these rules and regulations will increase ourlegal and financial compliance costs and will make some activities moretime-consuming and costly.

In addition, theSarbanes-Oxley Act requires, among other things, that we maintain effectiveinternal controls for financial reporting and disclosure controls andprocedures. In particular, we must perform system and process evaluation andtesting of

 

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our internal controlsover financial reporting to allow management to report on the effectiveness ofits internal controls over financial reporting, as required by Section 404of the Sarbanes-Oxley Act. Our compliance with Section 404 will requirethat we incur substantial accounting and related expense and expend significantmanagement efforts. We will need to hire additional accounting and financialstaff to satisfy the ongoing requirements of Section 404. Moreover, if weare not able to comply with the requirements of Section 404, or if we orour independent registered public accounting firm identifies deficiencies inour internal controls over financial reporting that are deemed to be materialweaknesses, the market price of our stock could decline and we could be subjectto sanctions or investigations by the Nasdaq Global Market, SEC or otherregulatory authorities.

***We are a defendant in a class action lawsuit and astockholder derivative lawsuit which, if determined adversely, could have amaterial adverse affect on us.***

A class actionsecurities lawsuit and a stockholder derivative lawsuit was filed against us,as described under “Part II, Item 1—Legal Proceedings.” We are defendingagainst these actions vigorously; however, we do not know what the outcome ofthese proceedings will be and, if we do not prevail, we may be required to paysubstantial damages or settlement amounts. Furthermore, regardless of theoutcome, we may incur significant defense costs, and the time and attention ofour management may be diverted from normal business operations. If we areultimately required to pay significant defense costs, damages or settlementamounts, such payments could materially and adversely affect our operations andresults. We have purchased liability insurance, however, if any costs orexpenses associated with the litigation exceed the insurance coverage, we maybe forced to bear some or all of these costs and expenses directly, which couldbe substantial and may have an adverse effect on our business, financialcondition, results of operations and cash flows. In any event, publicitysurrounding the lawsuits and/or any outcome unfavorable to us could adverselyaffect our reputation and share price. The uncertainty associated withsubstantial unresolved lawsuits could harm our business, financial conditionand reputation.

We have certainobligations to indemnify our officers and directors and to advance expenses tosuch officers and directors. Although we have purchased liability insurance forour directors and officers, if our insurance carriers should deny coverage, orif the indemnification costs exceed the insurance coverage, we may be forced tobear some or all of these indemnification costs directly, which could besubstantial and may have an adverse effect on our business, financialcondition, results of operations and cash flows. If the cost of our liabilityinsurance increases significantly, or if this insurance becomes unavailable, wemay not be able to maintain or increase our levels of insurance coverage forour directors and officers, which could make it difficult to attract or retainqualified directors and officers.

***Fluctuations in currency exchange rates may negativelyimpact our business.***

We currently haveoperations in Belgium and are conducting clinical trials in Europe. Costsresulting from our operations in Europe are denominated primarily in localcurrencies, including the Euro, and are subject to fluctuations in currencyexchange rates. Further, we incur other operating expenses, including expensesrelated to clinical trials, which are denominated in Euros and other localcurrencies. Significant fluctuations in the currency exchange rates and generaleconomic conditions in the countries in which we do business, could harm ouroperating results.

***The carrying value of our investment in OXIS Internationalmay face future impairment.***

We account for ourinvestment in OXIS under the equity method of accounting following accountingprinciples bulletin (APB) No. 18. Any impairment charge would be requiredif we determined that any reduction in the OXIS market value over the carryingvalue was permanent.

**Risks Related to Our IntellectualProperty**

***Our success depends upon our ability to protect ourintellectual property and proprietary technologies.***

Our commercial successdepends on obtaining and maintaining patent protection and trade secretprotection of our product candidates, proprietary technologies and their uses,as well as successfully defending our patents against third-party challenges.We will only be able to protect our product candidates, proprietary technologiesand their uses from unauthorized use by third parties to the extent that validand enforceable patents or trade secrets cover them.

The patent positions ofpharmaceutical and biotechnology companies can be highly uncertain and involvecomplex legal and factual questions for which important legal principles remainunresolved. No consistent policy regarding the breadth of claims allowed inbiotechnology patents has emerged to date in the U.S. The biotechnology patentsituation outside the U.S. is even more uncertain. Changes in either the patentlaws or in interpretations of patent laws in the U.S. and other countries

 

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may diminish the value ofour intellectual property. Accordingly, we cannot predict the breadth of claimsthat may be allowed or enforced in our patents or in third-party patents.

The degree of futureprotection for our proprietary rights is uncertain because legal means affordonly limited protection and may not adequately protect our rights or permit usto gain or keep our competitive advantage. For example:

•      we or our licensors might not have beenthe first to make the inventions covered by each of its pending patentapplications and issued patents;

•      we or our licensors might not have been thefirst to file patent applications for these inventions;

•      others may independently develop similaror alternative technologies or duplicate any of our technologies;

•      it is possible that none of our pendingpatent applications will result in issued patents;

•      our issued patents may not provide abasis for commercially viable products, may not provide us with any competitiveadvantages, or may be challenged by third parties;

•      our issued patents may not be valid orenforceable;

•      we may not develop additional proprietarytechnologies that are patentable; and

•      the patents of others may have an adverse effect onour business.

 

Proprietary tradesecrets and unpatented know-how are also very important to our business.Although we have taken steps to protect our trade secrets and unpatentedknow-how, including entering into confidentiality agreements with third partiesand proprietary information and inventions agreements with employees,consultants and advisors, third parties may still obtain this information.Enforcing a claim that a third party illegally obtained and is using our tradesecrets or unpatented know-how is expensive and time consuming, and the outcomeis unpredictable. In addition, courts outside the U.S. may be less willing toprotect this information. Moreover, our competitors may independently developequivalent knowledge, methods and know-how.

***If we are sued for infringing intellectual property rightsof third parties, it will be costly and time consuming, and an unfavorableoutcome in that litigation would have a material adverse effect on ourbusiness.***

Our commercialsuccess depends upon our ability and the ability of any of our collaborators todevelop, manufacture, market, and sell our product candidates and use ourproprietary technologies without infringing the proprietary rights of thirdparties. Numerous U.S. and foreign issued patents and pending patentapplications, which are owned by third parties, exist in the fields in which weare developing products. Because patent applications can take many years toissue, there may be currently pending applications, unknown to us, which maylater result in issued patents that our product candidates or proprietarytechnologies may infringe. We have not conducted a complete search of existingpatents to identify existing patents that our product candidates or proprietarytechnologies may inadvertently infringe.

We may be exposedto future litigation by the companies holding these patents or other thirdparties based on claims that our product candidates and/or proprietarytechnologies infringe their intellectual property rights. If one of thesepatents was found to cover our product candidates, proprietary technologies ortheir uses, we or our collaborators could be required to pay damages and couldbe unable to commercialize our product candidates or use our proprietarytechnologies unless we obtained a license to the patent. A license to thesepatents may not be available to us or our collaborators on acceptable terms, ifat all.

There is a substantialamount of litigation involving patent and other intellectual property rights inthe biotechnology and biopharmaceutical industries generally. If a third partyclaims that we or our collaborators infringe on its technology, it may face anumber of issues, including:

•      infringement and other intellectualproperty claims which, with or without merit, may be expensive andtime-consuming to litigate and may divert management’s attention from its corebusiness;

 

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•      substantial damages for infringement,including treble damages and attorneys’ fees, as well as damages for productsdevelopment using allegedly infringing drug discovery tools or methods which wemay have to pay if a court decides that the product or proprietary technologyat issue infringes on or violates the third party’s rights;

•      a court prohibiting us from selling orlicensing the product or using the proprietary technology unless the thirdparty licenses its technology to us, which it is not required to do;

•      if a license is available from the thirdparty, we may have to pay substantial royalties, fees and/or grant crosslicenses to its technology; and

•      redesigning our products or processes sothey do not infringe, which may not be possible or may require substantialfunds and time.

We may also besubject to claims that we or our employees, who were previously employed atuniversities or other biotechnology or pharmaceutical companies, haveinadvertently or otherwise used or disclosed trade secrets or other proprietaryinformation of their former employers. Litigation may be necessary to defendagainst these claims. If we fail in defending such claims, in addition topaying monetary damages, we may lose valuable intellectual property rights or personnel.A loss of key research personnel or their work product could hamper or preventour ability to commercialize certain potential drugs, which could severely harmour business. Even if we are successful in defending against these claims,litigation could result in substantial costs and be a distraction tomanagement.

**Risks Related to Our Industry**

***Our product candidates are subject to extensive regulation,which can be costly and time consuming, cause unanticipated delays or preventthe receipt of the required approvals to commercialize our product candidates.***

The clinicaldevelopment, manufacturing, labeling, storage, record-keeping, futureadvertising, promotion, export, marketing and distribution of our productcandidates are subject to extensive regulation by the FDA and other regulatoryagencies in the U.S. and by comparable foreign governmental authorities. Theprocess of obtaining these approvals is expensive, often takes many years, andcan vary substantially based upon the type, complexity and novelty of theproducts involved. Approval policies or regulations may change. In addition,although members of our management have drug development and regulatoryexperience, as a company we have not previously filed the marketingapplications necessary to gain regulatory approvals for any product. This lackof experience may impede our ability to obtain FDA marketing approval in atimely manner, if at all, for the product candidates we are developing andcommercializing. We will not be able to commercialize our product candidates inthe U.S. until we obtain FDA approval and in other countries until we obtainapproval by comparable governmental authorities. Any delay in obtaining, orinability to obtain, these approvals would prevent us from commercializing ourproduct candidates.

***Even if any of our product candidates receive regulatoryapproval, they may still face future development and regulatory difficulties.***

If any of ourproduct candidates receive regulatory approval, the FDA and foreign regulatoryauthorities may still impose significant restrictions on the uses or marketingof the product candidates or impose ongoing requirements for post-approvalstudies. In addition, regulatory agencies subject a product, its manufacturerand the manufacturer’s facilities to continuing review and periodicinspections. If previously unknown problems with a product or its manufacturingfacility are discovered, a regulatory agency may impose restrictions on thatproduct, us, or our partners, including requiring withdrawal of the productfrom the market. Our candidates will also be subject to ongoing FDArequirements for submission of safety and other post-market information. If ourproduct candidates fail to comply with applicable regulatory requirements, aregulatory agency may:

•      issue warning letters;

•      impose civil or criminal penalties;

•      suspend regulatory approval;

 

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•      suspend any ongoing clinical trials;

•      refuse to approve pending applications orsupplements to approved applications filed by us or our collaborators;

•      impose restrictions on operations,including costly new manufacturing requirements; or

•      seize or detain products or require aproduct recall.

In order to marketany products outside of the U.S., we and our partners must establish and complywith numerous and varying regulatory requirements of other countries regardingsafety and efficacy. Approval procedures vary among countries and can involveadditional product testing and additional administrative review periods. Thetime required to obtain approval in other countries might differ from thatrequired to obtain FDA approval. The regulatory approval process in othercountries may include all of the risks detailed above regarding FDA approval inthe U.S. Regulatory approval in one country does not ensure regulatory approvalin another, but a failure or delay in obtaining regulatory approval in onecountry may negatively impact the regulatory process in others. Failure toobtain regulatory approval in other countries or any delay or setback inobtaining such approval could have the same adverse effects described aboveregarding FDA approval in the U.S., including the risk that our productcandidates may not be approved for all indications requested, which could limitthe uses of our product candidates and adversely impact potential royalties andproduct sales, and that such approval may be subject to limitations on theindicated uses for which the product may be marketed or require costly,post-marketing follow-up studies.

If we and ourpartners fail to comply with applicable foreign regulatory requirements, we andour partners may be subject to fines, suspension or withdrawal of regulatoryapprovals, product recalls, seizure of products, operating restrictions andcriminal prosecution.

***If our competitors have products that are approved faster,marketed more effectively or demonstrated to be more effective than ourproducts, then our commercial opportunity will be reduced or eliminated.***

The biotechnologyand biopharmaceutical industries are characterized by rapidly advancingtechnologies, intense competition and a strong emphasis on proprietaryproducts. We face competition from many different sources, including commercialpharmaceutical and biotechnology enterprises, academic institutions, governmentagencies and private and public research institutions. Due to the high demandfor treatments for CNS diseases and disorders, research is intense and newtreatments are being sought out and developed by our competitors.

In addition, manyother competitors are developing products for the treatment of the diseases weare targeting and if successful, these products could compete with ourproducts. If we receive approval to market and sell any of our productcandidates, we may compete with these companies and their products as well asothers in varying stages of development.

Many of ourcompetitors have significantly greater financial resources and expertise inresearch and development, manufacturing, preclinical testing, clinical trials,regulatory approvals and marketing approved products than we do. Smaller orearly-stage companies may also prove to be significant competitors,particularly through collaborative arrangements with large and establishedcompanies. Our competitors may succeed in developing technologies and therapiesthat are more effective, better tolerated or less costly than ours, or thatwould render our product candidates obsolete and noncompetitive. Ourcompetitors may succeed in obtaining approvals from the FDA and foreignregulatory authorities for their products sooner than we do. We will also facecompetition from these third parties in recruiting and retaining qualifiedscientific and management personnel, establishing clinical trial sites and patientregistration for clinical trials, and in acquiring and in-licensingtechnologies and products complementary to our programs or advantageous to ourbusiness.

***We are subject to uncertainty relating to health care reformmeasures and reimbursement policies which, if not favorable to our productcandidates, could hinder or prevent the commercial success of our productcandidates.***

The continuing efforts ofthe government, insurance companies, managed care organizations and otherpayors of health care costs to contain or reduce costs of health care mayadversely affect our:

•      ability to set a price we believe is fairfor our products;

•      ability to generate revenues and achieveprofitability;

•      future revenues and profitability ofpotential customers, suppliers and collaborators; and

 

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•      the availability of capital.

In certain foreignmarkets, the pricing of prescription drugs is subject to government control. Inthe U.S., given recent federal and state government initiatives directed atlowering the total cost of health care, Congress and state legislatures willlikely continue to focus on health care reform, the cost of prescription drugsand the reform of the Medicare and Medicaid systems. For example, a new Medicareprescription drug benefit program began in 2006. While we cannot predict thefull outcome of the implementation of this legislation or whether any futurelegislative or regulatory proposals affecting our business will be adopted, theannouncement or adoption of these proposals could materially and adverselyaffect our business, financial condition, and results of operations.

Our ability tocommercialize our product candidates successfully will depend in part on theextent to which governmental authorities, private health insurers and otherorganizations establish appropriate reimbursement levels for the cost of ourproducts and related treatments. Third-party payors are increasinglychallenging the prices charged for medical products and services. Also, thetrend toward managed health care in the U.S., which could significantlyinfluence the purchase of health care services and products, as well aslegislative proposals to reform health care or reduce government insuranceprograms, may result in lower prices for our product candidates or exclusion ofits product candidates from reimbursement programs. The cost containmentmeasures that health care payors and providers are instituting and the effectof any health care reform could materially and adversely affect our results ofoperations.

***Product liability claims may harm our business if ourinsurance coverage for those claims is inadequate.***

We face an inherent riskof product liability exposure related to the testing of our product candidatesin human clinical trials, and will face an even greater risk if we sell ourproduct candidates commercially. An individual may bring a liability claimagainst us if one of our product candidates causes, or merely appears to havecaused, an injury. If we cannot successfully defend ourselves against theproduct liability claim, we will incur substantial liabilities. Regardless ofmerit or eventual outcome, liability claims may result in:

•      decreased demand for our productcandidates;

•      injury to our reputation;

•      withdrawal of clinical trialparticipants;

•      costs of related litigation;

•      substantial monetary awards to patientsor other claimants;

•      loss of revenues; and

•      the inability to commercialize ourproduct candidates.

We have product liabilityinsurance that covers our clinical trials, up to an annual aggregate limit of$5.0 million. We intend to expand our insurance coverage to include thesale of commercial products if marketing approval is obtained for any of ourproduct candidates. However, insurance coverage is increasingly expensive. Wemay not be able to maintain insurance coverage at a reasonable cost and we maynot be able to obtain insurance coverage that will be adequate to satisfy anyliability that may arise.

***We use hazardous chemicals and radioactive and biologicalmaterials in our business. Any claims relating to improper handling, storage ordisposal of these materials could be time-consuming and costly.***

Our research anddevelopment processes involve the controlled use of hazardous materials, includingchemicals, radioactive and biological materials. Our operations producehazardous waste products. We cannot eliminate the risk of accidentalcontamination or discharge and any resultant injury from those materials.Federal, state and local laws and regulations govern the use, manufacture,storage, handling and disposal of hazardous materials. We may be sued for anyinjury or contamination that results from our use or the use by third partiesof these materials. Compliance with environmental laws and regulations may beexpensive, and current or future environmental regulations may impair ourresearch, development and production efforts.

 

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** **

**Risks Related to our Common Stock**

** **

***Our stock price has been, and is expected to continue to be,volatile.***

The market price of ourcommon stock could be subject to significant fluctuations. Market prices forsecurities of early-stage pharmaceutical, biotechnology and other life sciencescompanies have historically been particularly volatile. Some of the factorsthat may cause the market price of our common stock to fluctuate include:

•        the results of our current and any futureclinical trials of our product candidates;

•        the results of ongoing preclinicalstudies and planned clinical trials of our preclinical product candidates;

•        the entry into, or termination of, keyagreements, including key strategic alliance agreements;

•        the results and timing of regulatoryreviews relating to the approval of our product candidates;

•        the initiation of, material developmentsin, or conclusion of litigation to enforce or defend any of our intellectualproperty rights;

•        general and industry-specific economicconditions that may affect our research and development expenditures;

•        the results of clinical trials conductedby others on drugs that would compete with our product candidates;

•        issues in manufacturing our productcandidates or any approved products;

•        the loss of key employees;

•        the introduction of technologicalinnovations or new commercial products by our competitors;

•        failure of any of our product candidates,if approved, to achieve commercial success;

•        changes in estimates or recommendationsby securities analysts, if any, who cover our common stock;

•        future sales of our common stock;

•        changes in the structure of health carepayment systems; and

•        period-to-period fluctuations in ourfinancial results.

Moreover, the stockmarkets in general have experienced substantial volatility that has often beenunrelated to the operating performance of individual companies. These broadmarket fluctuations may also adversely affect the trading price of our commonstock.

In the past, followingperiods of volatility in the market price of a company’s securities,stockholders have often instituted class action securities litigation againstthose companies. Such litigation, if instituted, could result in substantialcosts and diversion of management attention and resources, which couldsignificantly harm our profitability and reputation.

***Anti-takeover provisions in our stockholder rights plan andin our certificate of incorporation and bylaws may prevent or frustrateattempts by stockholders to change the board of directors or current managementand could make a third-party acquisition difficult.***

We are a party to astockholder rights plan, also referred to as a poison pill, which is intendedto deter a hostile takeover of us by making such proposed acquisition moreexpensive and less desirable to the potential acquirer. The stockholder rightsplan and our certificate of incorporation and bylaws, as amended, containprovisions that may discourage, delay or prevent a merger, acquisition or otherchange in control that stockholders may consider favorable, includingtransactions in which stockholders might otherwise receive a premium for theirshares. These provisions could limit the price that investors might be willingto pay in the future for shares of our common stock.

***Our largest stockholders may take actions that are contraryto your interests, including selling their stock.***

A small number ofour stockholders hold a significant amount of our outstanding stock. Thesestockholders may support competing transactions and have interests that aredifferent from yours. In addition, the average number of shares of our stockthat trade each day is generally low. As a result, sales of a large number ofshares of our stock by these large stockholders or other stockholders within ashort period of time could adversely affect our stock price.

 

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***Our management has broad discretion over the use of our cashand we may not use our cash effectively, which could adversely affect ourresults of operations.***

Our management hassignificant flexibility in applying our cash resources and could use theseresources for corporate purposes that do not increase our market value, or inways with which our stockholders may not agree. We may use our cash resourcesfor corporate purposes that do not yield a significant return or any return atall for our stockholders, which may cause our stock price to decline.

***Raising additional funds by issuing securities or throughcollaboration and licensing arrangements may cause dilution to existingstockholders, restrict operations or require us to relinquish proprietaryrights.***

We may raiseadditional funds through public or private equity offerings, debt financings orcorporate collaboration and licensing arrangements. To the extent that we raiseadditional capital by issuing equity securities, our existing stockholders’ownership will be diluted. Any debt financing we enter into may involvecovenants that restrict our operations. These restrictive covenants may includelimitations on additional borrowing, specific restrictions on the use of ourassets as well as prohibitions on our ability to create liens, pay dividends,redeem stock or make investments. In addition, if we raise additional fundsthrough collaboration and licensing arrangements, it may be necessary torelinquish potentially valuable rights to our potential products or proprietarytechnologies, or grant licenses on terms that are not favorable to us.

***There is only a limited trading market for our common stockand it is possible that investors may not be able to sell their shares easily.***

There is currentlyonly a limited trading market for our common stock. Our common stock trades onthe Nasdaq Global Market under the symbol “TPTX” with very limited trading volume.We cannot assure investors that a substantial trading market will be sustainedfor our common stock.

 

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**Item6. Exhibits**
| **Number** | ** ** | **Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                    |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 2.1        |       | Agreement and Plan of Merger and Reorganization, dated  as of June 7, 2006, by and among Axonyx Inc., Autobahn  Acquisition, Inc. and TorreyPines Therapeutics, Inc. (incorporated  by reference to Annex A to Registration Statement No. 333-136018 filed  with the Securities and Exchange Commission on July 25, 2006).                                                             |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 2.2        |       | Amendment No. 1 to Agreement and Plan of Merger  and Reorganization, dated as of August 25, 2006, by and among Axonyx  Inc., Autobahn Acquisition, Inc. and TorreyPines Therapeutics, Inc.  (incorporated by reference to Annex A to Amendment No. 1 to Registration  Statement No. 333-136018 filed with the Securities and Exchange  Commission on August 25, 2006).       |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1        |       | Certificate of Incorporation of the Registrant  (incorporated by reference to Exhibit 3.1 to the Registrant’s Current  Report on Form 8-K, filed on October 10, 2006).                                                                                                                                                                                                                      |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2        |       | Bylaws of the Registrant (incorporated by reference  to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K,  filed on October 10, 2006).                                                                                                                                                                                                                                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.3        |       | Certificate of Amendment filed with the Secretary of  State of the State of Nevada effecting an 8-for-1 reverse stock split of the  Registrant’s common stock and changing the name of the Registrant from Axonyx  Inc. to TorreyPines Therapeutics, Inc. (incorporated by reference to  Exhibit 3.3 to the Registrant’s Current Report on Form 8-K, filed  on October 10, 2006). |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.4        |       | Articles of Conversion filed with the Secretary of  State of the State of Nevada changing the state of incorporation of the  Registrant (incorporated by reference to Exhibit 3.4 to the Registrant’s  Current Report on Form 8-K, filed on October 10, 2006).                                                                                                                              |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.5        |       | Certificate of Conversion filed with the Secretary  of State of the State of Delaware (incorporated by reference to  Exhibit 3.5 to the Registrant’s Current Report on Form 8-K, filed  on October 10, 2006).                                                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.6        |       | Amendment to Bylaws of the Registrant (incorporated  by reference to Exhibit 3.6 to the Registrant’s Annual Report on Form 10-K,  filed on March 29, 2007).                                                                                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.1        |       | Specimen common stock certificate of the Registrant  (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly  Report on Form 10-Q, filed on August 14, 2007).                                                                                                                                                                                                                              |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.2        |       | Form of Warrant to Purchase Common Stock issued  to previous holders of TPTX, Inc. redeemable convertible preferred stock  in connection with the business combination between TorreyPines  Therapeutics, Inc. and Axonyx, Inc. (incorporated by reference to  Exhibit 4.2 to the Registrant’s Annual Report on Form 10-K, filed on March  29, 2007).                                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.3        |       | Form of Common Stock Purchase Warrant  (incorporated by reference to Exhibit 4.3 to Registrant’s Annual Report on  Form 10-KSB filed on March 13, 2000).                                                                                                                                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.4        |       | Form of Registration Rights Agreement 1999  (incorporated by reference to Exhibit 4.4 to the March 13, 2000  10-KSB).                                                                                                                                                                                                                                                                                 |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.5        |       | Form of Warrant issued to Stonegate Securities  (incorporated by reference to the corresponding exhibit to Registrant’s  Annual Report on Form 10-KSB filed on March 22, 2001).                                                                                                                                                                                                             |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.6        |       | Form of Common Stock Purchase Warrant issued to  purchasers in a private placement on December 6, 2001 (incorporated by  reference to Exhibit 10.2 to Registrant’s Current Report on  Form 8-K filed on December 13, 2001).                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.7        |       | Form of Warrant issued to SCO Financial Group,  LLC (incorporated by reference to exhibit 4.5 to Registrant’s  Registration Statement on Form S-3 (File No. 333-76234) filed on  January 3, 2002).                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.8        |       | Form of Common Stock Purchase Warrant issued to  purchasers in a private placement on January 6, 2003 (incorporated by  reference to Exhibit 10.2 in Registrant’s Current Report on Form 8-K  filed on January 8, 2003).                                                                                                                                                          |

 

 

 

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| **Number** | ** ** | **Exhibits**                                                                                                                                                                                                                                                                                                                               |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.9        |       | Form of Warrant issued to AFO Advisors, LLC  (incorporated by reference to Exhibit 4.2 in Registrant’s registration  statement on Form S-3 (File No. 333-103130) filed on  February 12, 2003).                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.10       |       | Form of Common Stock Purchase Warrant issued to  purchasers in a private placement on September 12, 2003 (incorporated by  reference to Exhibit 10.2 in Registrant’s Current Report on  Form 8-K filed on September 16, 2003).                                                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.11       |       | Form of Common Stock Purchase Warrant issued to  purchasers in a private placement on January 8, 2004 (incorporated by  reference to Exhibit 4.3 in Registrant’s Current Report on Form 8-K  filed on January 12, 2004).                                                                                     |
|       |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.12       |       | Registration Rights Agreement dated as of  January 8, 2004 between Axonyx Inc. and certain investors (incorporated  by reference to Exhibit 4.2 in the current report on Form 8-K  previously filed by Axonyx Inc. on January 12, 2004)                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.13       |       | Registration Rights Agreement dated as of  May 3, 2004, between Axonyx Inc. and certain investors (incorporated by  reference to Exhibit 4.2 in the current report on Form 8-K  previously filed by Axonyx Inc. on May 5, 2004)                                                                                        |
|       |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.14       |       | Form of Warrant issued to Comerica Bank on  July 1, 2003 (incorporated by reference to Exhibit 4.14 to the  Registrant’s Annual Report on Form 10-K, filed on March 29, 2007).                                                                                                                                              |
|       |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.15       |       | Form of Warrant issued to Silicon Valley Bank  on December 8, 2000 (incorporated by reference to Exhibit 4.15 to the  Registrant’s Annual Report on Form 10-K, filed on March 29, 2007).                                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.16       |       | Form of Warrant issued to Oxford Financial and  Silicon Valley Bank on September 27, 2005 (incorporated by reference to  Exhibit 4.16 to the Registrant’s Annual Report on Form 10-K, filed on March  29, 2007).                                                                                                            |
|       |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.17       |       | Rights Agreement, dated as of May 13, 2005,  between the Registrant and American Stock Transfer and Trust Company  (replacing Nevada Agency and Trust Company), as Rights Agent (incorporated by  reference to Exhibit 99.2 to the Registrant’s Current Report on  Form 8-K, filed on May 16, 2005).              |
|       |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.18       |       | Amendment to Rights Agreement, dated as of  June 7, 2006, between the Registrant and American Stock Transfer and  Trust Company (replacing Nevada Agency and Trust Company), as Rights Agent  (incorporated by reference to Exhibit 4.1 to the Registrant’s Current  Report on Form 8-K, filed on June 12, 2006). |
|       |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.19       |       | Amendment to Rights Agreement, dated as of  October 3, 2006, between the Registrant and American Stock Transfer and  Trust Company (replacing Nevada Agency and Trust Company), as Rights Agent  (incorporated by reference to Exhibit 4.19 to the Registrant’s Annual Report  on Form 10-K, filed on March 29, 2007).           |
|       |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.20       |       | Reference is made to Exhibits 3.1 through 3.6.                                                                                                                                                                                                                                                                                             |
|       |       |                                                                                                                                                                                                                                                                                                                                       |
| 31.1       |       | Certification of Principal Executive Officer  pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                                                                                       |
| 31.2       |       | Certification of Principal Financial and Accounting  Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                                                                                       |
| 32.1       |       | Certification of Principal Executive Officer  pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                      |
|       |       |                                                                                                                                                                                                                                                                                                                                       |
| 32.2       |       | Certification of Principal Financial and Accounting  Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                       |

 

 

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

Date: November 14, 2007
|   | TorreyPines Therapeutics, Inc.                                                                                                                                                 |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                           |
|   | By:                                                                                                                                                                            | /s/ Neil M. Kurtz, M.D. |   |
|   | Neil M. Kurtz, M.D.

  President and Chief Executive Officer

  (Principal Executive Officer)                                                              |
|   |                                                                                                                                                                           |
|   | By:                                                                                                                                                                            | /s/ Craig Johnson |   |
|   | Craig Johnson

  Vice President, Finance

  Chief Financial Officer, and

  Secretary

  (Principal Financial and Accounting  Officer) |

 

 

 

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