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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30, 2004



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission File No. 000  50564



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RENOVIS, INC.

(Exact Name of Registrant as Specified in its Charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|DELAWARE                                                       |  | 94-3353740                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|TWO CORPORATE DRIVE SOUTH SAN FRANCISCO, CALIFORNIA            |  | 94080                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             



(650) 266-1400

Registrants telephone number, including area code



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Indicate by
check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



As of November 10, 2004, 24,570,830 shares of our Common Stock, $.001 par value, were outstanding.



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##### Table of Contents

Renovis, Inc.



INDEX



|           |  |                                                                                               |  |   
|---------- |  | --------------------------------------------------------------------------------------------- |  | --
|Part I.    |  | Financial Information                                                                         |  |   
|           |  |                                                                                              
|           |  | Item 1. Financial Statements (Unaudited)                                                      |  |   
|           |  |                                                                                              
|           |  | Condensed Balance Sheets  September 30, 2004 and December 31, 2003                           |  | 3 
|           |  |                                                                                              
|           |  | Condensed Statements of Operations  Three and Nine Months Ended September 30, 2004 and 2003  |  | 4 
|           |  |                                                                                              
|           |  | Condensed Statements of Cash Flows  Nine Months Ended September 30, 2004 and 2003            |  | 5 
|           |  |                                                                                              
|           |  | Notes to Condensed Financial Statements                                                       |  | 6 
|           |  |                                                                                              
|           |  | Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 11
|           |  |                                                                                              
|           |  | Item 3.
Quantitative and Qualitative Disclosures About Market Risk                            |  | 27
|           |  |                                                                                              
|           |  | Item 4.
Controls and Procedures                                                               |  | 27
|           |  |                                                                                              
|Part II.   |  | Other Information                                                                             |  |   
|           |  |                                                                                              
|           |  | Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 28
|           |  |                                                                                              
|           |  | Item 6
Exhibits                                                                               |  | 28
|           | 
|Signatures |  | 29                                                                                           



2



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##### Table of Contents

RENOVIS, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)



|                                                                                                                                                                                                                                                                                                                                                                                          |  |                   |          |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                                                                                                                                                                                                                          |  | September 30,2004 |          |   | December 31,2003 |  
|Assets                                                                                                                                                                                                                                                                                                                                                                                    |  |                   |          |   |                  |   |         |  
|Current assets:                                                                                                                                                                                                                                                                                                                                                                           |  |                   |          |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                 |  | $                 | 5,050    |   |                  | $ | 1,752   |  
|Short-term investments                                                                                                                                                                                                                                                                                                                                                                    |  |                   | 89,294   |   |                  |   | 39,685  |  
|Prepaids and other current assets                                                                                                                                                                                                                                                                                                                                                         |  |                   | 2,375    |   |                  |   | 2,314   |  
|                                                                                                                                                                                                                                                                                                                                                                                          |  |                   |          |   |                  |   |         |  
|Total current assets                                                                                                                                                                                                                                                                                                                                                                      |  |                   | 96,719   |   |                  |   | 43,751  |  
|                                                                                                                                                                                                                                                                                                                                                                                          |  |                  
|Property and equipment, net                                                                                                                                                                                                                                                                                                                                                               |  |                   | 5,956    |   |                  |   | 5,619   |  
|Intangible assets, net                                                                                                                                                                                                                                                                                                                                                                    |  |                   | 1,338    |   |                  |   | 2,199   |  
|Other assets                                                                                                                                                                                                                                                                                                                                                                              |  |                   | 309      |   |                  |   | 982     |  
|                                                                                                                                                                                                                                                                                                                                                                                          |  |                   |          |   |                  |   |         |  
|                                                                                                                                                                                                                                                                                                                                                                                          |  | $                 | 104,322  |   |                  | $ | 52,551  |  
|                                                                                                                                                                                                                                                                                                                                                                                          |  |                   |          |   |                  |   |         |  
|Liabilities and stockholders equity (net capital deficiency)                                                                                                                                                                                                                                                                                                                             |  |                   |          |   |                  |   |         |  
|Current liabilities:                                                                                                                                                                                                                                                                                                                                                                      |  |                   |          |   |                  |   |         |  
|Accounts payable                                                                                                                                                                                                                                                                                                                                                                          |  | $                 | 81       |   |                  | $ | 685     |  
|Accrued compensation                                                                                                                                                                                                                                                                                                                                                                      |  |                   | 1,117    |   |                  |   | 729     |  
|License fees payable, current portion                                                                                                                                                                                                                                                                                                                                                     |  |                   | 132      |   |                  |   | 414     |  
|Loans payable, current portion                                                                                                                                                                                                                                                                                                                                                            |  |                   | 1,332    |   |                  |   | 1,577   |  
|Deferred revenue                                                                                                                                                                                                                                                                                                                                                                          |  |                   | 2,626    |   |                  |   |        |  
|Other accrued liabilities                                                                                                                                                                                                                                                                                                                                                                 |  |                   | 3,965    |   |                  |   | 2,760   |  
|                                                                                                                                                                                                                                                                                                                                                                                          |  |                   |          |   |                  |   |         |  
|Total current liabilities                                                                                                                                                                                                                                                                                                                                                                 |  |                   | 9,253    |   |                  |   | 6,165   |  
|                                                                                                                                                                                                                                                                                                                                                                                          |  |                  
|Loans payable, noncurrent portion                                                                                                                                                                                                                                                                                                                                                         |  |                   | 2,154    |   |                  |   | 684     |  
|Deferred revenue, noncurrent portion                                                                                                                                                                                                                                                                                                                                                      |  |                   | 655      |   |                  |   |        |  
|Other long-term liabilities                                                                                                                                                                                                                                                                                                                                                               |  |                   | 835      |   |                  |   | 988     |  
|Commitments                                                                                                                                                                                                                                                                                                                                                                               |  |                   |          |   |                  |   |         |  
|Convertible preferred stock, $0.001 par value; 0 and 69,282,358 shares authorized at September 30, 2004 and December 31, 2003, respectively;
issuable in series; 0 and 15,344,817 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively; aggregate liquidation preference of $0 and $130,062 at September 30, 2004 and December 31, 2003,
respectively. |  |                   |         |   |                  |   | 123,266 |  
|Stockholders equity (net capital deficiency):                                                                                                                                                                                                                                                                                                                                            |  |                   |          |   |                  |   |         |  
|Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding                                                                                                                                                                                                                                                                                               |  |                   |         |   |                  |   |        |  
|Common stock, $0.001 par value; 100,000,000 and 87,000,000 shares authorized at September 30, 2004 and December 31, 2003, respectively;
24,314,987 and 1,348,128 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively.                                                                                                                                 |  |                   | 24       |   |                  |   | 1       |  
|Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                                |  |                   | 214,095  |   |                  |   | 18,982  |  
|Notes receivable from stockholders                                                                                                                                                                                                                                                                                                                                                        |  |                   | (1       | ) |                  |   | (43     | )
|Deferred stock compensation                                                                                                                                                                                                                                                                                                                                                               |  |                   | (10,985  | ) |                  |   | (15,451 | )
|Accumulated other comprehensive loss                                                                                                                                                                                                                                                                                                                                                      |  |                   | (308     | ) |                  |   |        |  
|Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                       |  |                   | (111,400 | ) |                  |   | (82,041 | )
|                                                                                                                                                                                                                                                                                                                                                                                          |  |                   |          |   |                  |   |         |  
|Total stockholders equity (net capital deficiency)                                                                                                                                                                                                                                                                                                                                       |  |                   | 91,425   |   |                  |   | (78,552 | )
|                                                                                                                                                                                                                                                                                                                                                                                          |  |                   |          |   |                  |   |         |  
|                                                                                                                                                                                                                                                                                                                                                                                          |  | $                 | 104,322  |   |                  | $ | 52,551  |  
|                                                                                                                                                                                                                                                                                                                                                                                          |  |                   |          |   |                  |   |         |  



See accompanying notes.



3



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##### Table of Contents

RENOVIS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)



|                                                                         |  |                                 |            |   |                                |   |         |      |  |   |            |   |  |   |         |  
|------------------------------------------------------------------------ |  | ------------------------------- | ---------- | - | ------------------------------ | - | ------- | ---- |  | - | ---------- | - |  | - | ------- | -
|                                                                         |  | Three Months EndedSeptember 30, |            |   | Nine Months EndedSeptember 30, |  
|                                                                         |  | 2004                            |            |   | 2003                           |   |         | 2004 |  |   | 2003       |  
|Contract revenues                                                        |  | $                               | 656        |   |                                | $ |        |      |  | $ | 1,969      |   |  | $ | 4,500   |  
|                                                                         |  |                                 |            |  
|Operating expenses:                                                      |  |                                 |            |   |                                |   |         |      |  |   |            |   |  |   |         |  
|Research and development                                                 |  |                                 | 8,577      |   |                                |   | 5,249   |      |  |   | 22,192     |   |  |   | 12,587  |  
|General and administrative                                               |  |                                 | 2,092      |   |                                |   | 1,373   |      |  |   | 6,276      |   |  |   | 4,594   |  
|Amortization of employee stock-based compensation                        |  |                                 | 1,177      |   |                                |   | 310     |      |  |   | 3,610      |   |  |   | 644     |  
|Acquired in-process research and development                             |  |                                 |           |   |                                |   |        |      |  |   |           |   |  |   | 17,305  |  
|                                                                         |  |                                 |            |   |                                |   |         |      |  |   |            |   |  |   |         |  
|Total operating expenses                                                 |  |                                 | 11,846     |   |                                |   | 6,932   |      |  |   | 32,078     |   |  |   | 35,130  |  
|                                                                         |  |                                 |            |   |                                |   |         |      |  |   |            |   |  |   |         |  
|Loss from operations                                                     |  |                                 | (11,190    | ) |                                |   | (6,932  | )    |  |   | (30,109    | ) |  |   | (30,630 | )
|Interest income                                                          |  |                                 | 410        |   |                                |   | 114     |      |  |   | 1,025      |   |  |   | 238     |  
|Interest expense                                                         |  |                                 | (71        | ) |                                |   | (120    | )    |  |   | (276       | ) |  |   | (389    | )
|                                                                         |  |                                 |            |   |                                |   |         |      |  |   |            |   |  |   |         |  
|Net loss                                                                 |  |                                 | (10,851    | ) |                                |   | (6,938  | )    |  |   | (29,360    | ) |  |   | (30,781 | )
|                                                                         |  |                                 |            |  
|Deemed dividend upon issuance of Series E convertible preferred stock    |  |                                 |           |   |                                |   | (43,393 | )    |  |   |           |   |  |   | (43,393 | )
|                                                                         |  |                                 |            |   |                                |   |         |      |  |   |            |   |  |   |         |  
|Net loss attributable to common stockholders                             |  | $                               | (10,851    | ) |                                | $ | (50,331 | )    |  | $ | (29,360    | ) |  | $ | (74,174 | )
|                                                                         |  |                                 |            |   |                                |   |         |      |  |   |            |   |  |   |         |  
|Basic and diluted net loss per share attributable to common stockholders |  | $                               | (0.45      | ) |                                | $ | (50.34  | )    |  | $ | (1.41      | ) |  | $ | (82.57  | )
|                                                                         |  |                                 |            |   |                                |   |         |      |  |   |            |   |  |   |         |  
|Shares used to compute basic and diluted net loss per share              |  |                                 | 24,265,528 |   |                                |   | 999,846 |      |  |   | 20,763,786 |   |  |   | 898,267 |  
|                                                                         |  |                                 |            |   |                                |   |         |      |  |   |            |   |  |   |         |  



See accompanying notes.



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RENOVIS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                            |  |                                |          |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | ------- | -
|                                                                            |  | Nine Months EndedSeptember 30, |         
|                                                                            |  | 2004                           |          |   | 2003 |  
|Cash flows from operating activities                                        |  |                                |          |   |      |   |         |  
|Net loss                                                                    |  | $                              | (29,360  | ) |      | $ | (30,781 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                |          |   |      |   |         |  
|Depreciation and amortization                                               |  |                                | 2,011    |   |      |   | 1,810   |  
|Amortization of deferred stock compensation                                 |  |                                | 3,610    |   |      |   | 644     |  
|Loss on disposal of fixed assets                                            |  |                                |         |   |      |   | 24      |  
|Acquired in-process research and development                                |  |                                |         |   |      |   | 17,305  |  
|Noncash interest and issuances of equity                                    |  |                                | 1,094    |   |      |   | 852     |  
|Change in operating assets and liabilities:                                 |  |                                |          |   |      |   |         |  
|Prepaids and other current assets                                           |  |                                | (60      | ) |      |   | (556    | )
|Other assets                                                                |  |                                | 673      |   |      |   | (213    | )
|Accounts payable                                                            |  |                                | (604     | ) |      |   | 419     |  
|Accrued compensation                                                        |  |                                | 388      |   |      |   | 64      |  
|License fees payable                                                        |  |                                | (282     | ) |      |   | (467    | )
|Deferred revenue                                                            |  |                                | 3,281    |   |      |   |        |  
|Other accrued liabilities                                                   |  |                                | 1,287    |   |      |   | 1,183   |  
|                                                                            |  |                                |          |   |      |   |         |  
|Net cash used in operating activities                                       |  |                                | (17,962  | ) |      |   | (9,716  | )
|                                                                            |  |                               
|Cash flows from investing activities                                        |  |                                |          |   |      |   |         |  
|Capital expenditures                                                        |  |                                | (1,488   | ) |      |   | (1,196  | )
|Purchases of short-term investments                                         |  |                                | (198,768 | ) |      |   | (59,406 | )
|Sales of short-term investments                                             |  |                                | 102,350  |   |      |   | 17,988  |  
|Maturities of short-term investments                                        |  |                                | 46,500   |   |      |   | 9,000   |  
|Cash paid relating to asset acquisition                                     |  |                                |         |   |      |   | (138    | )
|                                                                            |  |                                |          |   |      |   |         |  
|Net cash used in investing activities                                       |  |                                | (51,406  | ) |      |   | (33,752 | )
|                                                                            |  |                               
|Cash flows from financing activities                                        |  |                                |          |   |      |   |         |  
|Principal payments on loans payable                                         |  |                                | (1,761   | ) |      |   | (1,519  | )
|Proceeds from loans payable                                                 |  |                                | 2,910    |   |      |   | 391     |  
|Proceeds from issuance of common stock, net of repurchases                  |  |                                | 71,475   |   |      |   | 708     |  
|Proceeds from repayment of stockholder notes payable                        |  |                                | 42       |   |      |   |        |  
|Proceeds from issuance of convertible preferred stock                       |  |                                |         |   |      |   | 44,678  |  
|                                                                            |  |                                |          |   |      |   |         |  
|Net cash provided by financing activities                                   |  |                                | 72,666   |   |      |   | 44,258  |  
|                                                                            |  |                                |          |   |      |   |         |  
|Net increase in cash and cash equivalents                                   |  |                                | 3,298    |   |      |   | 790     |  
|Cash and cash equivalents at beginning of period                            |  |                                | 1,752    |   |      |   | 4,669   |  
|                                                                            |  |                                |          |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                              | 5,050    |   |      | $ | 5,459   |  
|                                                                            |  |                                |          |   |      |   |         |  
|Supplemental schedule of noncash financing activities                       |  |                                |          |   |      |   |         |  
|Conversion of preferred stock into common stock                             |  | $                              | 123,266  |   |      | $ |        |  
|Deemed dividend to preferred stockholders                                   |  |                                |         |   |      |   | 43,393  |  



See accompanying notes



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##### Table of Contents

RENOVIS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)



1. Summary of Significant Accounting Policies



The Company and Nature of Operations



Renovis, Inc. (the Company or Renovis) was incorporated in the state of Delaware on January 5, 2000. Renovis is a biopharmaceutical company developing drugs to treat
neurological diseases and disorders. Its facilities are located in South San Francisco, CA.



From inception through December 31, 2003, Renovis was a development stage enterprise and its financial statements during that period were prepared in conformity with accounting principles generally accepted in the
United States of America governing development stage enterprises. Beginning January 1, 2004, the Company exited the development stage after entering into a collaborative research, development and license agreement with Genentech, Inc. (see note 5).



The Company has sustained operating losses since inception and expects such
losses to continue over the next several years. Management plans to continue to finance the operations with a combination of equity issuances, debt arrangements, and revenues from corporate alliances with pharmaceutical companies. If adequate funds
are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its research or development programs.



Basis of Preparation



The Company has prepared the condensed financial statements following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under
those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles can be condensed or omitted. In the opinion of management, the financial statements include all normal and
recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in
these interim financial statements may not be the same as those for the full year. The information included in this quarterly report on Form 10-Q should be read in conjunction with the financial statements and accompanying notes included in our
Annual Report on Form 10-K for the year ended December 31, 2003.



The condensed
balance sheet amounts at December 31, 2003, have been derived from audited financial statements.



Reclassifications



Certain reclassifications have been made to prior period amounts to conform to the current period presentation.



Restricted Cash



As of September 30, 2004 and December 31, 2003, prepaids and other current assets included
restricted cash of $673,000 related to bank certificates of deposit to collateralize the rent deposit on the Companys facility in South San Francisco, California.



Use of Estimates



The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The Company operates in one business segment.



Revenue Recognition



Revenue under collaborative agreements is recognized based on the performance requirements of the agreement. Amounts received under such arrangements consist of
up-front license fees and include periodic milestone payments upon the achievement of certain events. Up-front payments which are subject to future performance requirements are recorded as deferred revenue and are amortized over the performance
period. The performance period is estimated at the inception of the arrangement and is periodically reevaluated. The reevaluation of the performance period may shorten or lengthen the period during which the deferred revenue is recognized which
would result in an acceleration or delay of expected revenue recognition. Payments received related to substantive, at-risk milestones are recognized upon achievement of the scientific or regulatory event specified in the underlying agreement.



Reverse Stock Split



In January 2004, the Board of Directors approved a 1-for-4.5 reverse stock split of its
convertible preferred stock and common stock. The split was effective shortly before the completion of the initial public offering on February 10, 2004. An amended and restated certificate of incorporation was filed immediately prior to the closing
of the initial public offering setting the authorized common stock and authorized preferred stock to 100,000,000 and 5,000,000 shares, respectively. All common share, preferred share and per share amounts contained in the financial statements have
been retroactively adjusted to reflect the reverse stock split for all periods presented.



2. Stock-Based Compensation



The
Company accounts for employee stock options using the intrinsic-value method in accordance with Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees (APB Opinion No. 25),
Financial Accounting Standards Board Interpretation (FIN) No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB No. 25, and related interpretations and has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123).



The option valuation models used to value the options under SFAS No. 123 were developed for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected price volatility. Because the employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective input can materially affect the fair value estimate, in the Companys opinion, the existing models do not necessarily provide a reliable single measure of the fair
value of the Companys employee stock options.



The Company has elected to
continue to follow the intrinsic value method of accounting as prescribed by APB Opinion No. 25. The information regarding net loss as required by SFAS No. 123 has been determined as if the Company had accounted for its employee stock options under
the fair value method of that Statement. The resulting effect on net loss pursuant to SFAS No. 123 is not likely to be representative of the effects on net loss pursuant to SFAS No. 123 in future years, since future years are likely to include
additional grants and the irregular impact of future years vesting.



6



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##### Table of Contents

RENOVIS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS(Continued)



The following table illustrates the weighted average assumptions for the Black-Scholes model used in determining the fair value of options granted to employees:



|                        |  |                                 |   |  |                                |   |  |         |   |  |         |  
|----------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ------- | - |  | ------- | -
|                        |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                        |  | 2004                            |   |  | 2003                           |   |  | 2004    |   |  | 2003    |  
|Dividend yield:         |  | 0                               |   |  | 0                              |   |  | 0       |   |  | 0       |  
|Risk-free interest rate |  | 3.5                             | % |  | 2.9                            | % |  | 3.0     | % |  | 2.9     | %
|Volatility:             |  | 0.8                             |   |  | 0.8                            |   |  | 0.8     |   |  | 0.8     |  
|Expected life:          |  | 5 years                         |   |  | 5 years                        |   |  | 5 years |   |  | 5 years |  



During the period from January 1, 2003
through January 31, 2004, certain stock options were granted with exercise prices that were below the estimated fair value of the common stock at the date of grant. The deferred compensation balance at September 30, 2004 of $10,985,000 was recorded
in accordance with APB Opinion No. 25, and is being amortized on a straight-line basis over the related performance period of the options. The Company recorded amortization of employee stock-based compensation of $1,177,000 and $3,610,000 for the
three and nine months ended September 30, 2004 and $310,000 and $644,000 for the three and nine months ended September 30, 2003, respectively.



For purposes of disclosures pursuant to SFAS No. 123, as amended by Statement of Financial Accounting Standards No. 148 Accounting for Stock-Based Compensation
 Transition and Disclosure (SFAS No. 148), the estimated fair value of options is amortized to expense over the options vesting period. The following table illustrates the effect on net loss and net loss per share if the Company
had applied the fair value recognition provisions of SFAS No.123 to stock based employee compensation (in thousands, except per share amounts).



|                                                                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                                                                |  | 2004                            |         |   | 2003                           |   |         | 2004 |  |   | 2003    |  
|Net loss attributable to common stockholders, as reported                                       |  | $                               | (10,851 | ) |                                | $ | (50,331 | )    |  | $ | (29,360 | ) |  |   | (74,174 | )
|                                                                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Plus: Employee stock compensation expense based on intrinsic value method                       |  |                                 | 1,177   |   |                                |   | 310     |      |  |   | 3,610   |   |  |   | 644     |  
|Less: Employee stock compensation expense determined under the fair value method for all awards |  |                                 | (1,525  | ) |                                |   | (465    | )    |  |   | (4,246  | ) |  |   | (968    | )
|                                                                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net loss, pro forma                                                                             |  |                                 | (11,199 | ) |                                |   | (50,486 | )    |  |   | (29,996 | ) |  |   | (74,498 | )
|                                                                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net loss per share:                                                                             |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted, as reported                                                                  |  | $                               | (0.45   | ) |                                | $ | (50.34  | )    |  | $ | (1.41   | ) |  | $ | (82.57  | )
|                                                                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted, pro forma                                                                    |  | $                               | (0.46   | ) |                                | $ | (50.49  | )    |  | $ | (1.44   | ) |  | $ | (82.94  | )
|                                                                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  



In March 2004, the FASB issued an
Exposure Draft for a proposed SFAS, Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95 (the Exposure Draft). The Exposure Draft would eliminate the ability to account for share-based compensation
transactions using APB 25, and generally would require such transactions be accounted for using a fair-value-based method and the resulting cost recognized in the financial statements. As proposed, companies would be required to recognize an expense
for compensation cost related to share-based payment arrangements including stock options and employee stock purchase plans. Current estimates of option values using the Black-Scholes method (as shown above) may not be indicative of results from
valuation methodologies ultimately adopted in the final rules. The FASB expects to issue a final standard by December 31, 2004. The Company is closely monitoring developments related to the Exposure Draft and will adopt the final standards, if any,
upon issuance.



7



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##### Table of Contents

RENOVIS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS(Continued)



3. Comprehensive Loss



The
Companys total comprehensive net loss was the same as its net loss for the period from inception (January 2000) through March 31, 2004. During the three and nine months ended September 30, 2004, the Company included other comprehensive income
of $128,000 representing unrealized gains on available for sale securities and $308,000 representing cumulative unrealized losses on available for sale securities, respectively, as part of total comprehensive loss. Total comprehensive loss for the
three and nine-month periods ended September 30, 2004 was $10,723,000 and $29,668,000, respectively.



4. Net Loss Per Share



Basic net loss
per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss by the
weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, preferred stock, options, and warrants are considered to be common stock equivalents and are
only included in the calculation of diluted net loss per share when their effect is dilutive.



|                                                                                          |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------------------------------------- |  | ---------------------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                          |  | Three Months EndedSeptember 30,                |            |   | Nine Months Ended September 30, |  
|                                                                                          |  | 2004                                           |            |   | 2003                            |   |            | 2004 |  |   | 2003       |  
|                                                                                          |  | (in thousands except share and per share data) |           
|Historical:                                                                               |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Numerator:                                                                                |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net loss attributable to common stockholders                                              |  | $                                              | (10,851    | ) |                                 | $ | (50,331    | )    |  | $ | (29,360    | ) |  | $ | (74,174    | )
|                                                                                          |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Denominator:                                                                              |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Weighted average common shares outstanding                                                |  |                                                | 24,550,597 |   |                                 |   | 1,376,425  |      |  |   | 21,137,196 |   |  |   | 1,206,286  |  
|Less: Weighted average unvested common shares subject to repurchase                       |  |                                                | (285,069   | ) |                                 |   | (376,579   | )    |  |   | (373,410   | ) |  |   | (308,019   | )
|                                                                                          |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Denominator for basic and diluted net loss per share attributable to common stockholders  |  |                                                | 24,265,528 |   |                                 |   | 999,846    |      |  |   | 20,763,786 |   |  |   | 898,267    |  
|                                                                                          |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted net loss per share attributable to common stockholders                  |  | $                                              | (0.45      | ) |                                 |   | (50.34     | )    |  | $ | (1.41      | ) |  |   | (82.57     | )
|                                                                                          |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|                                                                                          |  |                                                |            |  
|Historical outstanding dilutive securities not included in net loss per share calculation |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Preferred stock                                                                           |  |                                                |           |   |                                 |   | 15,344,817 |      |  |   |           |   |  |   | 15,344,817 |  
|Options to purchase common stock                                                          |  |                                                | 2,731,238  |   |                                 |   | 2,220,859  |      |  |   | 2,731,238  |   |  |   | 2,220,859  |  
|Warrants                                                                                  |  |                                                | 51,210     |   |                                 |   | 51,210     |      |  |   | 51,210     |   |  |   | 51,210     |  
|                                                                                          |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|                                                                                          |  |                                                | 2,782,448  |   |                                 |   | 17,616,886 |      |  |   | 2,782,448  |   |  |   | 17,616,886 |  
|                                                                                          |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  



5. Collaboration Agreements



On December 31, 2003, the Company entered into a collaborative research,
development and license agreement with Genentech (Genentech Agreement) under which the Company received an upfront payment of $5,250,000. Additionally, as part of the Genentech Agreement and concurrent with the Companys initial public
offering, Genentech purchased 250,000 shares of common stock for an additional $3,000,000, or $12.00 per share. The Genentech Agreement also provides for future milestones and royalties in connection with the development and commercialization of
products that may arise from the collaboration. The Company has deferred the $5,250,000 upfront payment and is recognizing it on a straight-line basis over the two-year estimated research period of the agreement. During the three and nine months
ended September 30, 2004 the Company recognized $656,000 and $1,969,000 in revenue related to this agreement, respectively. Contract revenue during the 2003 period resulted from $4.5 million in milestone payments we earned from AstraZeneca upon
approval from the FDA to commence Phase III clinical trials with Cerovive (NXY-059).



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##### Table of Contents

RENOVIS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS(Continued)



6. Other Current Accrued Liabilities



Other current accrued liabilities consist of the following (in thousands):



|                                  |  |                   |       |                  |   |      
|--------------------------------- |  | ----------------- | ----- | ---------------- | - | -----
|                                  |  | September 30,2004 |       | December 31,2003
|Accrued professional fees         |  | $                 | 718   |                  | $ | 817  
|Rent obligation                   |  |                   | 422   |                  |   | 618  
|Early exercise price payable      |  |                   | 308   |                  |   | 544  
|Clinical trials costs             |  |                   | 1,919 |                  |   | 557  
|Accrued other                     |  |                   | 598   |                  |   | 224  
|                                  |  |                   |       |                  |   |      
|Other current accrued liabilities |  | $                 | 3,965 |                  | $ | 2,760
|                                  |  |                   |       |                  |   |      



7. Loans Payable



In April 2001 and October 2001, the Company entered into credit facilities that provide up
to an aggregate of $5,000,000 to finance the purchase of equipment and tenant improvements. During 2002 and 2001, the Company borrowed approximately $200,000 and $4,800,000 under these credit facilities, payable in monthly installments over a period
of 36 months. Interest rates range from 10.96% to 11.97% on the advances, which are secured by the assets financed. In connection with the credit facilities, the Company issued warrants to purchase an aggregate of 43,210 shares of the Companys
common stock.



In April 2002 and July 2002, the Company entered into credit
facilities that provide up to an aggregate of $2,000,000 to finance the purchase of equipment and tenant improvements. Interest rates range from 9.12% to 9.75% on the advances, which are secured by the assets financed. In connection with the credit
facility, the Company issued warrants to purchase an aggregate of 8,000 shares of the Companys common stock.



In February 2004, the Company entered into a credit facility with a lender that provides up to an aggregate of $5,000,000 to finance the purchase of laboratory and
computer equipment and certain leasehold improvements. Under this agreement the Company borrowed approximately $2,910,000 during the nine months ended September 30, 2004. Payments are due in monthly installments over a period ranging from 42 to 48
months at interest rates ranging from 8.8% to 9.1%.



8. Convertible
Preferred Stock



On February 10, 2004, the Company completed its initial
public offering in which it sold 6,325,000 shares of common stock at $12.00 per share. Upon the closing of the offering, all 15,344,817 shares of the then outstanding preferred stock automatically converted into 16,208,583 shares of common stock.



9. Stockholders Equity (Net Capital Deficiency)



Common Stock



On February 10, 2004, the Company sold 6,325,000 shares of common stock to the public and
realized net proceeds of approximately $68,400,000. Additionally, concurrent with the initial public offering the Company completed a private placement with Genentech for 250,000 shares of common stock for proceeds of $3,000,000.



2003 Stock Plan



The Companys 2003 Stock Plan (2003 Plan) became effective concurrently with the
initial public offering. The Board of Directors authorized and reserved 333,333 shares of the Companys common stock for stock option grants under the 2003 Plan. The 2003 Plan also includes additional shares of common stock that have or will
have become available for issuance under the Companys predecessor stock option plan, the Amended and Restated 2003 Equity Incentive Plan. Additionally, on January 15 of each year during the term of the Plan, commencing in 2005, the number of
shares reserved for issuance under the Plan will be increased by the lesser of (i) 3.5% of the Companys outstanding shares of common stock on that date, (ii) 1,055,555 shares, or (iii) such lesser number determined by our Board of Directors.



The 2003 Plan permits the Company to grant incentive stock options,
nonstatutory stock options, stock appreciation rights, restricted stock, deferred stock, dividend equivalents, performance share awards, stock payments and other stock related benefits, or any combination thereof to employees or consultants of the
Company. The Companys non-employee Directors are also eligible to receive grants under the 2003 Plan.



Incentive stock options awarded to employees may be granted at an exercise price no less than the fair market value of the common stock on the date of grant. Options become exercisable as determined by the Board of
Directors, generally at the rate of 25% at the end of the first year, with the remaining balance vesting ratably over the next three years, or 1/48thper month such that the options will be fully vested after four years. Options granted under the 2003 Plan expire no more than ten years after the date of grant.



9



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##### Table of Contents

RENOVIS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS(Continued)



Employee Stock Purchase Plan



On February 4, 2004, the Companys Employee Stock Purchase Plan ( Purchase Plan) became effective. A total of 611,111 shares of Company common stock have been
initially reserved for issuance under the Purchase Plan. The Purchase Plan provides for an annual increase to the shares of common stock reserved under the plan on each January 1 equal to the lesser of 194,444 shares, 0.75% of our outstanding shares
on such date, or a lesser amount determined by our board of directors. Employees scheduled to work more than 20 hours per week for more than five calendar months per year are eligible to participate in the Purchase Plan.



The Purchase Plan will be implemented by a series of offerings of approximately 24-months in
duration. The initial offering commenced on February 4, 2004. Within the offering, there will be a series of semi-annual purchase periods with the first period commencing on February 4, 2004 and will end on the last business day of
November 2004. The purchase price for shares of common stock purchased at the end of a purchase period in an offering will be the lesser of 85% of the market price of common stock on a participants entry date into the offering period, or 85%
of the market price of common stock on the last business day of the purchase period. Participants may contribute up to 20% of their cash earnings through payroll deductions, and the accumulated deductions will be applied to the purchase of shares on
each semi-annual purchase date.



Inducement Stock Options



In July and August 2004, Renovis granted employment inducement stock
options covering a total of 220,760 shares to certain newly hired executives. These options were granted without stockholder approval pursuant to NASDAQ Marketplace Rule 4350 (i)(1)(A)(iv) and in accordance with Renovis standard stock option
terms, including a 10-year term and four year vesting, and were granted at exercise prices equal to the fair market value on the date of grant.



10



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including those set forth above under the caption Business  Risk Factors. You should read the following discussion and analysis of our financial condition and
results of operations together with our interim financial statements and the related notes appearing at the beginning of this report. The interim financial statements and this Managements Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2003 and the related Managements Discussion and Analysis of Financial Condition and Results of Operations, both
of which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2004.



Overview



We are a biopharmaceutical company developing drugs to treat neurological diseases and disorders. We currently focus our research and development efforts in the areas of neuroprotection, pain and neuroinflammatory
diseases. Our most advanced product candidate is Cerovive® (NXY-059), a neuroprotectant currently in two Phase III clinical trials to determine its effect on disability and neurological recovery in acute ischemic stroke patients. These trials commenced in May 2003 and are
being conducted by our exclusive licensee, AstraZeneca AB (AstraZeneca). Upon commercialization of Cerovive® (NXY-059), we will be entitled to receive mid-teen royalties on worldwide net sales. We are independently pursuing Phase II clinical trials with an oral drug candidate REN-1654, to
determine its effectiveness as a treatment for neuropathic pain. We hold exclusive worldwide rights to REN-1654. On July 29, 2004 we announced our decision to discontinue efforts to commercialize REN-213, an IV drug candidate that we were developing
for the treatment of acute post-operative pain. In addition to our clinical programs, we are conducting preclinical research and development activities in the areas of neuroprotection, pain and neuroinflammatory diseases to identify future product
candidates for clinical development. Since our inception in January 2000, we have generated significant losses and have funded our operations primarily through the sale of equity securities. On February 10, 2004 we completed our initial public
offering of common stock and concurrent private placement with Genentech, Inc. in which we raised net proceeds of approximately $71.4 million. As of September 30, 2004, we had an accumulated deficit of $111.4 million.



We expect to incur substantial and increasing losses for the next several years as we:



| |  | continue the development and prepare for commercialization of REN-1654;
| | - | -----------------------------------------------------------------------



| |  | expand our research and development programs; and
| | - | -------------------------------------------------



| |  | advance new product candidates into clinical development from our existing research programs.
| | - | ---------------------------------------------------------------------------------------------



In addition, we intend to take an opportunistic approach to acquiring or in-licensing technology and products and may also acquire or invest
in businesses that are complementary to our own.



Since our inception we have
generated all of our revenues from agreements with corporate partners. During 2003, we recorded $4.5 million in contract revenue related to milestone payments that we received from AstraZeneca following their receipt of regulatory approval to
commence Phase III trials for Cerovive (NXY-059). Upon achievement of certain future milestones involving the filing and approval of marketing applications in the U.S. and E.U., AstraZeneca is obligated to make additional payments to us totaling up
to $7.5 million. Upon commercialization of Cerovive (NXY-059), we are entitled to receive mid-teen percentage royalties on worldwide net sales from AstraZeneca.



On December 31, 2003 we entered into a collaborative research, development and license agreement with Genentech under which we received an up-front payment of $5.25
million. We have deferred the upfront payment and are recognizing it as contract revenue on a straight-line basis over the estimated research period of two years. Accordingly, we recognized $0.7 million and $2.0 million in revenue related to this
agreement during the three and nine months ended September 30, 2004, respectively. We expect to recognize revenue of approximately $2.6 million related to this agreement during 2004. The agreement with Genentech also provides for future milestones
and royalties in connection with the development and commercialization of products that may arise from the collaboration.



In contrast to Cerovive (NXY-059), which is licensed to AstraZeneca, we hold worldwide rights to commercialize REN-1654 and intend to market this product candidate
ourselves or with a co-promotion partner in the United States and through strategic collaborations outside of the United States. Alternatively, we may grant exclusive marketing rights in exchange for up-front fees, milestones and royalties on future
sales, if any. We currently contract with outside firms to manufacture REN-1654 and have no plans to establish internal manufacturing capability.



Clinical Update



| |  | On October 14, 2004, we announced that our exclusive licensee, AstraZeneca, would continue the Phase III SAINT trials with Cerovive (NXY-059) as planned based on a recommendation
from the Independent Data and Safety Monitoring Board (IDMB) following its review of data on safety and stroke outcomes after a three-month follow-up period in 1,000 patients. The purpose of this analysis was to assess whether it would be futile
(not meaningful) to continue the SAINT trials when looking at the degree of post-stroke disability experienced by patients who received drug as compared to patients who received placebo, and to determine if there were safety concerns. We also
announced that in August 2004 enrollment was initiated in the CHANT (Cerebral Hemorrhagic and NXY-059 Treatment) trial to assess the safety and tolerability of 72 hours intravenous infusion of Cerovive® (NXY-059) in adult patients with acute intracerebral hemorrhage.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We are independently developing REN-1654 for neuropathic pain in two Phase II clinical trials. The first of these trials is planned to involve 90 patients with post-herpetic
neuralgia (PHN) who developed PHN following an episode of shingles that began no more than 18 months prior to entering the study. Based on enrollment trends observed to date, we expect to report data from this trial in the first quarter of 2005. The
second of the Phase II clinical trials with REN-1654 in neuropathic pain is a placebo-controlled trial that is planned to enroll 72 patients, all of whom developed leg pain associated with sciatica no more than 12 weeks prior to enrollment. We
expect to report data from this study during 2005.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

As of September 30, 2004, we had $94.3 million in cash, cash equivalents and short-term investments. We anticipate that
our current cash, cash equivalents and short-term investments will enable us to maintain our currently planned operations for at least another 24 months. However, changes to our current operating plan may require us to consume our capital resources
significantly sooner than we expect.



Revenues



To date, all of our revenue has been earned under agreements with AstraZeneca and Genentech.
We do not expect to generate revenue from product sales or royalties until at least 2007, if at all. We seek to generate revenue from a combination of product sales, up-front fees and milestone payments in connection with collaborative or strategic
relationships, and royalties resulting from the license of our intellectual property. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of milestone payments we may receive from our
collaborative or strategic relationships, as well as those we may receive upon the sale of our products, to the extent any are successfully commercialized. Revenue derived from collaborative and strategic relationships helps us fund our operations
and may increase in the future if we are successful in achieving milestones in our existing collaborations, licensing our technology, and establishing new collaborations or strategic relationships. If we are unsuccessful in these goals, our revenues
will decline and we may be required to limit our research and development, clinical trial, manufacturing and marketing efforts.



Research and Development Expenses



Our research and development (R&D) expenses consist primarily of costs associated with research, preclinical development and clinical trials involving product
opportunities we are pursuing internally in the areas of neuroprotection, pain, and neuroinflammatory diseases. We do not incur research and development costs for Cerovive (NXY-059), which is licensed to AstraZeneca.



The expenses we incur in connection with our research, preclinical and clinical development
consist primarily of:



| |  | employee compensation;
| | - | ----------------------



| |  | supplies and materials;
| | - | -----------------------



| |  | costs for consultants, contract research and clinical trials (including non-cash expenses for options granted to non-employees);
| | - | --------------------------------------------------------------------------------------------------------------------------------



| |  | license fees;
| | - | -------------



| |  | facilities and overhead costs;
| | - | ------------------------------



| |  | funded R&D at other companies and research institutions;
| | - | --------------------------------------------------------



| |  | manufacturing of clinical drug supplies; and
| | - | --------------------------------------------



| |  | depreciation of equipment.
| | - | --------------------------



R&D costs, including some upfront fees and milestones paid to collaborators, are expensed as incurred. The timing of upfront fees and milestone payments in the future may cause variability in our future R&D
expenses.



Prior to our acquisition of pharmaceutical assets from Centaur in
December 2002, we had incurred research and development expenses of approximately $20.8 million to assemble a team of neurobiologists and establish specialized capabilities in assay development, screening, lead optimization, target identification
and target validation, which we used to pursue early stage research in the areas of neuroprotection and pain. We are unable to estimate the portion of costs incurred that are allocable to the individual research activities we have conducted because
we do not segregate costs among early-stage research programs for both management and external reporting. Moreover, given the early stage nature of these projects and the subsequent integration of intellectual property and product opportunities that
we acquired from Centaur, we are unable to reasonably estimate the cost or timeline required to generate cash inflows from our research efforts.



In the third quarter of 2004 we completed the implementation of our new financial accounting system, which will enable us to segregate pre-clinical development and
clinical trial costs on a project-by-project basis from the implementation date forward. However, we do not plan to segregate costs related to early-stage research activities because such costs are not specifically allocable to identifiable drug
candidates until the later stages of our research.



12



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##### Table of Contents

During the three and nine months ended September 30, 2004, we incurred research and development expenses of $8.6 million
and $22.2 million respectively. Of this amount, approximately $4.3 million and $11.3 million was spent by our preclinical and clinical development functions for the three and nine months ended September 30, 2004, respectively. Our preclinical
development activities during these periods included toxicology and efficacy studies of various development candidates in preclinical models of pain and neuroinflammatory disease as well as formulation and manufacturing of drug supply for these
studies. Our clinical development efforts during both periods were focused exclusively on initiating and conducting multiple Phase II clinical trials with REN-1654 and REN-213. As described above, we recently discontinued clinical development
activities involving REN-213. The remaining amount of $4.3 million and $10.9 million for the three and nine months ended September 30, 2004, respectively, was expended primarily on employee costs, supplies and materials and infrastructure related to
neurobiology, chemistry, pharmacology and related functions, which are integral to our preclinical research programs.



Development timelines and costs are difficult to estimate and may vary significantly for each product candidate and from quarter to quarter. The process of seeking
regulatory approvals, and the subsequent compliance with applicable regulations, requires the expenditure of substantial resources.



General and Administrative Expenses



General and administrative expenses consist primarily of compensation for employees in executive and operational functions, including finance, human resources and
business development. Other significant costs include facilities costs and professional fees for accounting and legal services, including legal services associated with obtaining and maintaining patents. We anticipate incurring increases in general
and administrative expenses, such as increased costs for insurance and investor relations associated with operating as a publicly-traded company. These increases will also likely include the hiring of additional personnel.



Critical Accounting Policies



Our discussion and analysis of our financial condition and results of operations are based
on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our financial statements included in
this report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.



Revenue Recognition



Revenue under our collaborative agreements is recognized based on the performance requirements of the agreement. Amounts received under such arrangements consist of up-front license fees and include periodic milestone
payments upon the achievement of certain events. Up-front payments which are subject to future performance requirements are recorded as deferred revenue and are amortized over the performance period. The performance period is estimated at the
inception of the arrangement and is periodically reevaluated. The reevaluation of the performance period may shorten or lengthen the period during which the deferred revenue is recognized which would result in an acceleration or delay of expected
revenue recognition. Payments received related to substantive, at-risk milestones are recognized upon achievement of the scientific or regulatory event specified in the underlying agreement.



Stock Compensation



We account for employee stock options using the intrinsic-value method in accordance with Accounting Principles Board (APB) Opinion No.
25,Accounting for Stock Issued to Employees, Financial Accounting Standards Board (FASB) Interpretation No. 44,Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB No. 25, and related
interpretations and have adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123,Accounting for Stock-Based Compensation.



In December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based CompensationTransition and Disclosure. SFAS No. 148
amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. We have elected to continue to follow the intrinsic value method of
accounting as prescribed by APB No. 25. The information regarding net loss as required by SFAS No. 123 has been determined as if we had accounted for our employee stock options under the fair value method of that statement. The resulting effect on
net loss pursuant to SFAS No. 123 is not likely to be representative of the effects on net loss pursuant to SFAS No. 123 in future years, since future years are likely to include additional grants and the irregular impact of future years
vesting.



Stock compensation expense, which is a non-cash charge, results from
stock option grants prior to our initial public offering at exercise prices below the deemed fair value of the underlying common stock resulting in our recording stock compensation associated with these grants. Stock compensation expense is
amortized over the vesting period of the underlying option, generally four years. From inception through September 30, 2004, we recorded amortization of deferred stock compensation of $5.5 million. At September 30, 2004, we had a total of $11.0
million remaining to be amortized over the performance period of the stock options.



Acquired In-Process Research and Development



Acquired
in-process research and development relates primarily to purchased technology, intellectual property and know-how. We evaluate the stage of development of acquired projects, taking into account the level of effort, time and estimated cost associated
with further developing the in-process technology and producing a commercial product. The nature of the remaining efforts for completion of acquired in-process research and development projects generally include completion of clinical trials,
completion of manufacturing validation, interpretation of clinical and preclinical data and obtaining marketing approval from the FDA and other regulatory bodies, the cost, length and success of which are extremely difficult to determine. Numerous
risks and uncertainties exist with timely completion of development projects, including clinical trial results, manufacturing process development results, and ongoing feedback from regulatory authorities, including obtaining marketing approval. In
addition, acquired products under development may never be successfully commercialized due to the uncertainties associated with the pricing of new pharmaceuticals, the cost of sales to produce these products in a commercial setting, changes in the
reimbursement environment, or the introduction of new competitive products. As a result of the uncertainties noted above, we expense such acquired in-process research and development projects when incurred.



Clinical Study Activities and Other Expenses from Third-Party Contract Research
Organizations



Some of our research and development, including certain
clinical study activity, is conducted by various third parties, including contract research organizations, which may also provide contractually defined administration and management services. We recognize expenses for these contracted activities
based upon a variety of factors, including actual and estimated patient enrollment rates, clinical site initiation activities, labor hours and other activity based factors. On a regular basis, our estimates of these costs are reconciled to actual
invoices from the service providers, and adjustments are made accordingly.



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Results of Operations



Comparison of the Three and Nine Months Ended September 30, 2004 and 2003



Revenue



Revenue for the three and nine months ended September 30, 2004 was $0.7 and $2.0 million, respectively, compared with $0 and $4.5 million for the same periods in 2003.
Revenue during the 2004 period resulted from a collaborative agreement with Genentech, which was signed at the end of 2003. Under this agreement with Genentech we received an up-front payment of $5.25 million that we are recognizing as revenue on a
straight-line basis over the two-year estimated research period of the agreement. Revenue during the 2003 period resulted from $4.5 million in milestone payments we earned from AstraZeneca upon approval from the FDA to commence Phase III clinical
trials with Cerovive (NXY-059).



Research and Development Expenses



Total research and development expenses and dollar and percentage change
as compared to the prior period are as follows (dollar amounts are in thousands):



|                    |  |                                 |       |                                |      |   |       |  |   |        |   |  |   |       
|------------------- |  | ------------------------------- | ----- | ------------------------------ | ---- | - | ----- |  | - | ------ | - |  | - | ------
|                    |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|                    |  | 2004                            |       |                                | 2003 |   | 2004  |  |   | 2003  
|Total R & D expense |  | $                               | 8,577 |                                |      | $ | 5,249 |  | $ | 22,192 |   |  | $ | 12,587
|Dollar increase     |  | $                               | 3,328 |                                |      |   |       |  | $ | 9,605  |   |  |   |       
|Percentage increase |  |                                 | 63    | %                              |      |   |       |  |   | 76     | % |  |   |       



The increase in R&D expense of
$3.3 million and $9.6 million in the three and nine months ended September 30, 2004, respectively, over the comparable period in 2003 was primarily due to factors related to the advancement of REN-1654 and REN-213 into phase II clinical trials that
began during the second half of 2003 and the first quarter of 2004, respectively, and due to the expansion of our preclinical programs.



Specific increases for the three months ended September 30, 2004 over the comparable period in 2003 included the following:



| |  | Clinical trial related costs increased by $0.9 million primarily because we did not initiate any clinical trials until the end of the third quarter in 2003 while multiple trials
with REN-1654 and REN-213 were ongoing during the third quarter of 2004;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Employee costs increased by $1.0 million primarily due to the increased number of employees in our pre-clinical and clinical development operations, merit pay increases and
increasing benefit costs and were partially offset by a decrease in consulting expense of $0.5 million;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Outside services costs increased by $0.9 million as we utilized third parties to assist with our internal pharmacology, toxicology and chemistry efforts;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Laboratory supplies and related materials costs increased by $0.6 million consistent with the increase in research staff to support our preclinical programs in neuroprotection, pain
and neuroinflammatory diseases; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Specific increases for the
nine months ended September 30, 2004 over the comparable period in 2003 included the following:



| |  | Clinical trial related costs increased by $3.8 million primarily because we did not initiate any clinical trials until the end of the third quarter in 2003 while multiple trials
with REN-1654 and REN-213 were ongoing during the nine months ended September 30, 2004;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Employee costs increased by $2.0 million primarily due to the increased number of employees in our pre-clinical and clinical development operations, merit pay increases and
increasing benefit costs;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Outside services costs increased by $1.4 million as we utilized third parties to assist with our internal pharmacology, toxicology and chemistry efforts;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | License fees increased $0.6 million in connection with the licensing of intellectual property for use in certain of our preclinical development programs;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Laboratory supplies and related materials costs increased by $0.4 million to support the expansion of our preclinical programs in neuroprotection, pain and neuroinflammatory
diseases; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Facilities related expenses and other shared expenses allocated to R&D increased by $0.8 million in 2004 primarily due to the new facility we leased beginning in the third
quarter of 2003.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  | Amortization expense related to the intangible assets acquired in the Centaur acquisition increased by $0.3 million primarily due to the additional contingent consideration that was
recognized in May 2003 as all earn-out conditions related to the asset acquisition were met. We recorded a portion of the additional contingent consideration as an intangible asset in the second quarter of 2003 which resulted in additional
amortization expense commencing in the second quarter of 2003.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The table below summarizes the current status of our drug candidates:



|                   |  |                  |  |                 |  |                             
|------------------ |  | ---------------- |  | --------------- |  | ----------------------------
|Program            |  | Indication       |  | Clinical Status |  | Commencement of CurrentPhase
|Cerovive (NXY-059) |  | Stroke           |  | Phase III       |  | Second quarter 2003         
|REN-1654           |  | Neuropathic Pain |  | Phase II        |  | Third quarter 2003          



We estimate that typical Phase I
clinical trials generally take 6 to 12 months to complete, Phase II clinical trials are expected to last approximately 12 to 24 months and Phase III clinical trials are expected to last approximately 24 to 48 months. However, the actual length of
clinical trials are based upon factors such as the intended use of the clinical product and the ability to enroll appropriate patients. Additionally, clinical trials of our drug candidates may fail to demonstrate safety and clinically significant
efficacy which would prevent or significantly delay regulatory approval.



We
expect research and development expenses to increase in future periods as we continue to advance existing drug candidates into later stages of clinical trials and move pre-clinical products into clinical trials. However, we currently do not have
estimates of total costs to reach regulatory approval for each drug candidate or in the aggregate as our drug candidates are subject to an uncertain and lengthy regulatory process which may not result in obtaining the necessary regulatory approval.



General and Administrative Expenses



Total general and administrative (G&A) expenses and dollar and percentage change as
compared to the prior period are as follows (dollar amounts are in thousands):



|                    |  |                                 |       |                                |      |   |       |  |   |       |   |  |   |      
|------------------- |  | ------------------------------- | ----- | ------------------------------ | ---- | - | ----- |  | - | ----- | - |  | - | -----
|                    |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|                    |  | 2004                            |       |                                | 2003 |   | 2004  |  |   | 2003 
|Total G & A expense |  | $                               | 2,092 |                                |      | $ | 1,373 |  | $ | 6,276 |   |  | $ | 4,594
|Dollar increase     |  | $                               | 719   |                                |      |   |       |  | $ | 1,682 |   |  |   |      
|Percentage increase |  |                                 | 52    | %                              |      |   |       |  |   | 37    | % |  |   |      



Overall general and administrative
expenses increased by $0.7 million and $1.7 million in the three and nine months ended September 30, 2004 from the comparable periods in 2003. The increase in G&A expense in 2004 over 2003 is primarily due to increased personnel costs and
outside services costs associated with establishing infrastructure appropriate for a public company. Intellectual property expenses also increased, as we continued to seek patent protection for the discoveries made in our preclinical drug
development programs.



We expect G&A expense to increase in the future
reflecting increased support activities associated with advancing existing drug candidates into later stages of clinical trials and advancing preclinical products into clinical trials and expenses associated with increased corporate governance
regulation principally associated with the Sarbanes-Oxley Act of 2002.



Amortization of Employee Stock-Based Compensation. In connection with the grant of stock options to employees and directors, we recorded deferred stock compensation of $11.0 million, net of related amortization for the period
beginning January 1, 2003 through September 30, 2004. The $11.0 million represents the difference between the exercise price and the deemed fair value of the underlying common stock on the date the options were granted. We recorded this amount as a
component of stockholders equity (net capital deficiency) and will amortize the amount, on a straight-line basis, as a non-cash charge to operations over the vesting period of the options. We recorded amortization of employee stock-based
compensation of $1.2 million and $3.6 million for the three and nine months ended September 30, 2004 and $ 0.3 million and $0.6 million for the three and nine months ended September 30, 2003.



Acquired In-Process Research and Development. In connection with the additional shares
issued by us to Centaur in the second quarter of 2003 following the commencement of Phase III clinical trials for Cerovive (NXY-059), we recorded an expense of $17.3 million. This additional expense related to the acquisition represented the
write-off of the estimated fair value of acquired in-process research and development that had not reached technological feasibility and had no alternative future use.



The principal technology acquired as part of the Centaur acquisition related to Cerovive (NXY-059) and REN-1654 that were in the process of
being developed. The fair value of each of the in-process research and development projects was based on an income approach that attempts to estimate the future cash flows from the technology based on its successful development, net of tax.



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##### Table of Contents

Interest Income.



Total interest income and dollar and percentage changes as compared to the prior period are as follows (dollar amounts are in thousands):



|                      |  |                                 |     |                                |      |   |      |  |   |       |   |  |   |    
|--------------------- |  | ------------------------------- | --- | ------------------------------ | ---- | - | ---- |  | - | ----- | - |  | - | ---
|                      |  | Three Months EndedSeptember 30, |     | Nine Months EndedSeptember 30,
|                      |  | 2004                            |     |                                | 2003 |   | 2004 |  |   | 2003 
|Total interest income |  | $                               | 410 |                                |      | $ | 114  |  | $ | 1,025 |   |  | $ | 238
|Dollar increase       |  | $                               | 296 |                                |      |   |      |  | $ | 787   |   |  |   |    
|Percentage increase   |  |                                 | 260 | %                              |      |   |      |  |   | 331   | % |  |   |    



The $296,000 and $787,000 increases in
interest income from the three and nine months ended September, 2003 as compared to the corresponding periods in 2004 were primarily attributable to higher average cash balances due to our initial public offering completed in early February 2004.



Interest Expense.



Total interest expense and dollar and percentage changes as compared to the prior period are
as follows (dollar amounts are in thousands):



|                       |  |                                 |     |    |                                |   |      |      |  |   |      |    |  |   |      |  
|---------------------- |  | ------------------------------- | --- | -- | ------------------------------ | - | ---- | ---- |  | - | ---- | -- |  | - | ---- | -
|                       |  | Three Months EndedSeptember 30, |     |    | Nine Months EndedSeptember 30, |  
|                       |  | 2004                            |     |    | 2003                           |   |      | 2004 |  |   | 2003 |   
|Total interest expense |  | $                               | (71 | )  |                                | $ | (120 | )    |  | $ | (276 | )  |  | $ | (389 | )
|Dollar decrease        |  | $                               | (49 | )  |                                |   |      |      |  | $ | (113 | )  |  |   |      |  
|Percentage decrease    |  |                                 | (41 | )% |                                |   |      |      |  |   | (29  | )% |  |   |      |  



The decrease in interest expense for
2004 was primarily due to the lower aggregate interest rates on our debt balances (related to the purchase of equipment and leasehold improvements) in 2004 as compared to the 2003 period.



2004 Financial Guidance



For the year ending December 31, 2004 we presently anticipate:



| |  | Total contract revenue from existing agreements of approximately $2.6 million; and
| | - | ----------------------------------------------------------------------------------



| |  | Total operating expenses, excluding the amortization of employee stock-based compensation, of $35 million to $40 million.
| | - | -------------------------------------------------------------------------------------------------------------------------



Liquidity and Capital Resources



To date, we have funded our operations primarily through the sale of equity securities. As
of September 30, 2004, we had received approximately $168.2 million from the sale of equity securities. In February 2004, we received approximately $71.4 million from our initial public offering of common stock and concurrent private placement with
Genentech. In addition, as of September 30, 2004, we had financed through loans the purchase of equipment and leasehold improvements totaling approximately $9.7 million, of which $3.5 million was outstanding at that date. These obligations are
secured by the purchased equipment and leasehold improvements, bear interest at rates ranging from approximately 8.80% to 11.97% and are due in monthly installments through September 2008.



At September 30, 2004, we had $94.3 million in cash, cash equivalents and short-term
investments as compared to $41.4 million as of December 31, 2003, an increase of $52.9 million. This increase resulted primarily from the net proceeds of $71.4 million from the completion of our initial public offering of common stock and concurrent
private placement with Genentech, partially offset by cash used in operating activities. Our cash and investments are invested in a diversified portfolio of financial instruments, including money market instruments, corporate notes and bonds,
government or governmental agency securities and other debt securities issued by financial institutions and other issuers with strong credit ratings.



Net cash used in operating activities was $18.0 million during the nine months ended September 30, 2004, compared to $9.7 million during the same period last year. The
increase in net cash used in operating activities in 2004 as compared to 2003 was primarily due to the increase in our operating expenses as we grew our research and development activities.



Net cash used in investing activities was $51.4 million during the nine months ended
September 30, 2004 as compared to $33.8 million during the same period in the prior year. The increase in cash used in investing activities in 2004 is primarily due to purchases of short-term investments with the proceeds from our initial public
offering, partially offset by sales and maturities of short-term investments.



Net cash provided by financing activities was $72.7 million for the nine months ended September 30, 2004, compared to $44.3 million provided by financing activities during the same period last year. The increase in cash provided by
financing activities in 2004 is primarily due to the net proceeds received from the completion of our initial public offering and concurrent private placement with Genentech and proceeds from our credit facilities partially offset by principal
payments on our credit facilities. The cash provided by financing activities during the same period in the prior year was primarily from the $44.7 million in net proceeds we received from the issuance of our Series E convertible preferred stock in
August 2003.



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##### Table of Contents

We have entered into a variety of license agreements relating to our research and development efforts, most of which
relate to product candidates in the early stage of preclinical development. We have cancelable license agreements relating to Cerovive (NXY-059) under which we could be required to pay $25,000 annually in minimum royalty payments through NDA
approval and $100,000 annually in minimum royalty payments after NDA approval. Additionally, low-single digit royalties are payable on net product sales.



Our future capital uses and requirements depend on numerous forward-looking factors. These factors include but are not limited to the following:



| |  | the progress of preclinical development and laboratory testing and clinical trials;
| | - | -----------------------------------------------------------------------------------



| |  | the time and costs involved in obtaining regulatory approvals;
| | - | --------------------------------------------------------------



| |  | delays that may be caused by evolving requirements of regulatory agencies;
| | - | --------------------------------------------------------------------------



| |  | the number of product candidates we pursue;
| | - | -------------------------------------------



| |  | the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims;
| | - | ----------------------------------------------------------------------------------------------------------



| |  | our plans to establish sales, marketing and/or manufacturing capabilities;
| | - | --------------------------------------------------------------------------



| |  | our ability to establish, enforce and maintain selected strategic alliances and activities required for product commercialization;
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| |  | the acquisition of technologies, products and other business opportunities that require financial commitments; and
| | - | ------------------------------------------------------------------------------------------------------------------



| |  | our revenues, if any, from successful development and commercialization of our products.
| | - | ----------------------------------------------------------------------------------------



Based upon our current operating plan, we believe that our cash and cash equivalents and short term investments as of September 30, 2004,
will be sufficient to meet our projected operating requirements for at least the next 24 months.



Until we can generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources. We may be required to seek additional sources of funding to complete development
and commercialization of our products. If we need to raise funds in the future, we may be required to raise those funds through public or private financings, strategic relationships or other arrangements. We cannot assure you that the funding, if
needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. Our failure to raise capital as and
when needed could have a negative impact on our financial condition and our ability to pursue our business strategy.



We did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose
entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded
contracts. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. We do not have relationships or transactions with persons or entities that derive
benefits from their non-independent relationship with us or our related parties.



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS



This Form 10-Q, including the sections entitled Business, Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations, contains
forward-looking statements.



Forward-looking statements include, but are not
limited to, statements about:



| |  | the progress, timing and completion of our research, development and clinical trials for product candidates;
| | - | ------------------------------------------------------------------------------------------------------------



| |  | whether clinical trial results will validate and support the safety and efficacy of our products:
| | - | -------------------------------------------------------------------------------------------------



| |  | our ability to market, commercialize and achieve market acceptance for product candidates;
| | - | ------------------------------------------------------------------------------------------



| |  | our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  | our estimates for future performance; and
| | - | -----------------------------------------



| |  | our estimates regarding anticipated operating losses and expenses, future revenues, capital requirements and our needs for additional financing.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------



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Forward-looking statements also include, but are not limited to, expectations of future levels of research and
development spending, general and administrative spending, levels of capital expenditures and operating results, sufficiency of our capital resources and our intention to seek revenue from product sales, up-front fees and milestone payments and
royalties resulting from the license of our intellectual property. Further, there can be no assurance that the necessary regulatory approvals will be obtained, that we will be able to develop commercially viable products or that any of our programs
will be partnered with pharmaceutical partners. These statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity,
performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include those listed under
Risk Factors and elsewhere in this Form 10-Q and other risks detailed in our reports filed with the Securities and Exchange Commission. In some cases, you can identify forward-looking statements by terminology such as may,
will, should, expects, intends, plans, anticipates, believes, estimates, predicts, potential, continue or the
negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We do
not intend to update any of the forward-looking statements after the date of this report or to conform these statements to actual results.



RISK FACTORS



An investment in our common stock is very risky. You should carefully consider the risks described below, together with all of the other information in this report,
our Annual Report on Form 10-K for the year ended December 31, 2003 and our Quarterly Report on Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004 before making a decision to invest in our common stock. If any of the following risks
actually occur, our business, financial condition, results of operations and growth prospects could be adversely affected. In this case, the trading price of our common stock could decline and you may lose all or part of your investment in our
common stock. Additional risks and uncertainties, not presently known to us, or that we presently deem as immaterial, may also adversely affect our business. If any of these additional risks and uncertainties occurs, the trading price of our common
stock could decline, and you might lose all or part of your investment.



Risks Related to Our Company



Clinical trials may fail to demonstrate the safety and efficacy of our product candidates, which could prevent or significantly delay their regulatory approval.



Our future success is dependent upon, among other factors, our ability to develop working products and our ability to successfully complete
clinical trials. All of our potential products currently are in research, preclinical development or the early stages of clinical testing, and commercialization of those products will not occur for at least the next several years, if at all. All of
our products will require extensive additional research and development prior to any commercial introduction. There can be no assurance that any of our research and development and clinical trial efforts will result in viable new products. In July
2004, we announced our decision to discontinue efforts to commercialize REN-213, an IV drug candidate we were developing for the treatment of acute post-operative pain subsequently, in October 2004, we announced our decision to discontinue efforts
to develop REN-214, a nasal formulation of REN-213. Any failure or substantial delay in completing clinical trials for our other product candidates, including Cerovive®(NXY-059) and, REN-1654 may severely harm our business. Before obtaining regulatory approval for the sale of any of our potential
products or potential products of our current and future strategic partners and licensees, we and our strategic partners or licensees must subject these product candidates to extensive preclinical and clinical testing to demonstrate their safety and
efficacy in humans. The success of this preclinical and clinical testing is critical to achieving our product development goals. If our product development efforts are unsuccessful, we will not obtain regulatory approval for them, we will not
generate sales from them, and our business and results of operations would be adversely affected.



Our licensee, AstraZeneca, is currently conducting Phase III clinical trials to test Cerovive (NXY-059) for efficacy in stroke patients. The Cerovive (NXY-059) Phase III clinical trials were designed to include
several interim analyses. At each interim analysis, an independent data and safety monitoring board will review patient data to evaluate the safety or efficacy of Cerovive (NXY-059). At such time, a decision can be made to either stop or continue
the Phase III clinical trials. If the Cerovive (NXY-059) trials are significantly delayed or fail to demonstrate that Cerovive (NXY-059) is safe and effective for stroke patients, our business and reputation would be harmed and our stock price would
be negatively affected.



Clinical trials are expensive, time-consuming and
typically take years to complete. In connection with clinical trials, we face the risks that:



| |  | a product candidate may not prove to be efficacious;
| | - | ----------------------------------------------------



| |  | we may discover that a product candidate may cause harmful side effects;
| | - | ------------------------------------------------------------------------



| |  | patients can die or suffer other adverse medical effects for reasons that may not be related to the product candidate being tested;
| | - | -----------------------------------------------------------------------------------------------------------------------------------



| |  | the results may not confirm the positive results of earlier trials; and
| | - | -----------------------------------------------------------------------



| |  | the results may not meet the level of statistical significance required by the FDA or other regulatory agencies.
| | - | ----------------------------------------------------------------------------------------------------------------



The results in early phases of clinical testing are based upon limited numbers of patients
and a limited follow-up period and our success may not be indicative of results in a large number of patients or long-term efficacy. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late
stage clinical trials even after achieving promising results in early stage development. The results from the Phase II clinical trials for Cerovive (NXY-059) may not be predictive of results obtained in the Phase III clinical trials and the results
from the Phase I and IIa clinical trials for REN-1654 may not be predictive of results obtained in the Phase IIb clinical trials. If a larger population of patients does not experience positive results, or if these results do not have a lasting
effect, our products may not receive approval from the FDA. Failure to demonstrate the safety and effectiveness of our products in larger patient populations could have a material adverse effect on our business that would cause our stock price to
decline significantly.



Failure to enroll patients for
clinical trials may cause delays in developing our product candidates.



We may encounter delays or rejections if we, our strategic partners or licensees are unable to enroll enough patients to complete clinical trials. Patient enrollment depends on many factors, including the size of the patient population, the
nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the trial. We have experienced delays in enrollment of the ongoing Phase II clinical trials involving REN-1654. These delays have resulted in
increased costs. Any such delays in planned patient enrollment in the future may result in further increased costs and delays, which could harm our ability to develop products.



The independent clinical investigators and contract research organizations that we and our strategic partners or
licensees rely upon to conduct clinical trials may not be diligent, careful or timely, and may make mistakes in the conduct of our trials.



We depend on independent clinical investigators and contract research organizations (CROs) to conduct our clinical trials under their agreements with us or, in the case
of Cerovive (NXY-059), with AstraZeneca. We are not employing these investigators, and we cannot control the amount or timing of resources that they devote to our programs. Our contracts with these investigators involve fixed fees. If the costs of
performing the clinical trials exceed estimates, these investigators may fail to devote sufficient time and resources to our drug development programs, fail to enroll patients as rapidly as expected, or otherwise fail to perform in a satisfactory
manner, regulatory approval and our introductions of new products will be delayed. We contract with CROs for execution of our clinical trials for our product candidates other than Cerovive (NXY-059). Failure of the CROs to meet their obligations
could adversely affect clinical development of our product candidates. Moreover, these independent investigators and CROs may also have relationships with other commercial entities, some of which may compete with us. If independent investigators and
CROs assist our competitors, it could harm our competitive position.



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##### Table of Contents

We depend on our licensee, AstraZeneca, for the completion of the Cerovive (NXY-059) clinical
program and for the commercialization of Cerovive (NXY-059).



Under
our exclusive license agreement with AstraZeneca, AstraZeneca is responsible for all aspects of clinical development of Cerovive. If Cerovive (NXY-059) receives regulatory approval, AstraZeneca will be responsible for marketing and sales of the
commercial product. Because AstraZeneca is responsible for these functions, we have no control over the development schedule or, if Cerovive (NXY-059) receives regulatory approval, the marketing plan for Cerovive. If the clinical trials for Cerovive
(NXY-059) are not successful, Cerovive (NXY-059) will not be commercialized. Moreover, if AstraZeneca elects to terminate the clinical program for Cerovive, the rights to develop and market Cerovive (NXY-059) will revert to us. If these rights
revert to us, we will have to fund the clinical programs for Cerovive (NXY-059) on our own, seek a strategic partner or licensee for clinical development or abandon Cerovive (NXY-059).



Our reliance on AstraZeneca poses a number of risks, including the following:



| |  | AstraZeneca has discretion to elect whether to pursue the development of Cerovive (NXY-059) or to abandon the clinical program at any time;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| |  | we cannot control whether AstraZeneca will devote sufficient resources to the clinical program and, if Cerovive (NXY-059) is approved by the FDA or other regulatory agencies, the
marketing plan for the commercial drug product;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | although we have no history of royalty payment disputes, even if Cerovive (NXY-059) is approved and commercialized, disputes may arise in the future with respect to the calculation
of royalty payments based on net sales related to Cerovive (NXY-059); and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | if AstraZeneca perceives that the market opportunity for Cerovive (NXY-059) or its profit margin from the sale of Cerovive (NXY-059) is too small to justify commercialization, the
interests and motivations of AstraZeneca may not be, or may not remain, aligned with ours.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If any of these risks materialize, it could delay the development schedule for Cerovive (NXY-059) and impair its commercialization.



If we or our strategic partners or licensees fail to obtain U.S. regulatory approvals for product candidates under
development, including our lead product candidate, Cerovive (NXY-059), and REN-1654, we will not be able to generate revenue in the U.S. market from the commercialization of product candidates.



We must receive FDA approval for each of our product candidates before we can commercialize
or sell that product candidate in the United States, and AstraZeneca, our licensee for Cerovive (NXY-059), must receive regulatory approval for Cerovive (NXY-059) and commercialize or sell Cerovive (NXY-059) before we will receive royalties. The FDA
can limit or deny their approval for many reasons, including:



| |  | a product candidate may be found to be unsafe or ineffective;
| | - | -------------------------------------------------------------



| |  | regulators may interpret data from preclinical testing and clinical trials differently and less favorably than the way we interpret it;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | regulators may not approve the manufacturing processes or facilities that we use; and
| | - | -------------------------------------------------------------------------------------



| |  | regulators may change their approval policies or adopt new regulations.
| | - | -----------------------------------------------------------------------



Failure to obtain FDA approval or any delay or setback in obtaining such approval could:



| |  | adversely affect our ability to market any drugs we develop independently or with strategic partners or licensees;
| | - | ------------------------------------------------------------------------------------------------------------------



| |  | impose additional costs and diminish any competitive advantages that we may attain; and
| | - | ---------------------------------------------------------------------------------------



| |  | adversely affect our ability to generate royalties or product revenues.
| | - | -----------------------------------------------------------------------



Any such failures or delays in the regulatory approval process for any of our product candidates would delay or diminish our receipt of product revenues, if any, and
would materially adversely affect our business, financial condition and results of operations.



Even if we obtain FDA approval, our product candidate may not be approved for all indications that we request, which could limit the uses of our product and adversely impact our potential royalties and product sales.
If FDA approval of a product is granted, such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing follow-up studies. As to any product for which marketing approval is
obtained, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping related to the product will be subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with
the product may result in restrictions on the product, including withdrawal of the product from the market. We may be slow to adapt, or we may never adapt, to changes in existing requirements or adoption of new requirements or policies.



If we fail to comply with applicable regulatory requirements, we may be subject to fines,
suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.



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If we or our strategic partners or licensees fail to obtain regulatory approvals in other countries
for product candidates under development, we will not be able to generate revenue in such countries from the commercialization of product candidates.



In order to market our products outside of the United States, we and our strategic partners and licensees must establish and comply with numerous and varying
regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other
countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA approval in the United States. Regulatory approval in one country does not
ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in
obtaining such approval could have the same adverse effects detailed above regarding FDA approval in the United States, including the risk that our product candidate may not be approved for all indications that we request, which could limit the uses
of our product and adversely impact our potential royalties and product sales and that such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing follow-up studies.



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



Even if our product candidates are approved and commercialized, competitive products may impede market acceptance of our products.



REN-1654 is intended to compete directly with existing drugs.
Hospitals, physicians or patients may conclude that our potential products are less safe or effective or otherwise less attractive than these existing drugs. Even if approved and commercialized, Cerovive (NXY-059) may fail to achieve market
acceptance with hospitals, physicians or patients. Similarly, hospitals, physicians or patients may continue to use existing drugs in preference to REN-1654. If REN-1654 is approved and commercialized, it will face significant competition in the
market for the treatment of neuropathic pain from gabapentin, a drug which is currently marketed by Pfizer Inc. If our products do not receive market acceptance for any reason, our revenue potential could be diminished which would materially
adversely affect our business, financial condition and results of operations.



Further, our competitors may develop new products that could be more effective or less costly, or that may seem more cost-effective, than our products. For example, although we believe that Cerovive (NXY-059)would not face direct
competition from products currently available to stroke victims, a number of organizations are conducting clinical trials of neuroprotectant drug candidates which, if approved and commercialized, would compete with Cerovive (NXY-059). Competitors
developing such products include Bayer AG, Yamanouchi Pharmaceutical Co. Ltd., Ono Pharmaceutical Co., Ltd., Merck & Company, Pharmos Corp., IVAX Pharmaceuticals, Inc., Vertex Pharmaceuticals Incorporated and D-Pharm Ltd. In addition, gabapentin
recently became available in generic form, which will cause a decrease in the average selling price from current levels and increases competition for REN-1654 for the treatment of neuropathic pain. In addition, Pfizer filed an NDA with the FDA in
October 2003 to obtain approval to market a successor product candidate to gabapentin called pregabalin, which has been shown effective for many neuropathic pain patients with fewer side effects than gabapentin. Other competitors working on other
treatments for neuropathic pain include NeurogesX, Inc., Novartis AG, CeNeS Pharmaceuticals plc, Xenoport, Inc. and AstraZeneca. Since REN-1654 is in the early stages of development, we cannot reliably assess its competitive advantages or
disadvantages in areas such as efficacy, safety, cost and administration compared to existing products or product candidates being developed by our competitors.



Most of our competitors have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical trials and
obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products. As a result, they may achieve product commercialization or patent protection earlier than we can, if at all. Hospitals, physicians, patients or the
medical community in general may not accept and use any products that we may develop.



We have no experience selling, marketing or distributing products and no internal capability to do so.



If we receive regulatory approval to commence commercial sales of any of our product candidates other than Cerovive (NXY-059), we will have to establish a sales and
marketing organization with appropriate technical expertise and supporting distribution capability. At present, we have no sales or marketing personnel. Factors that may inhibit our efforts to commercialize our products without strategic partners or
licensees include:



| |  | our inability to recruit and retain adequate numbers of effective sales and marketing personnel;
| | - | ------------------------------------------------------------------------------------------------



| |  | the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our products;
| | - | --------------------------------------------------------------------------------------------------------------------------



| |  | the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage against companies with broader product lines; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | unforeseen costs associated with creating an independent sales and marketing organization.
| | - | ------------------------------------------------------------------------------------------



As an alternative to establishing our own sales and marketing organization, we may engage a pharmaceutical or other healthcare company with
an existing distribution system and direct sales organization to assist us. We may not be able to successfully establish sales and distribution capabilities either on our own or in collaboration with third parties or gain market acceptance for our
products. To the extent we enter co-promotion or other licensing arrangements, any revenues we receive will depend on the efforts of third parties and we may not succeed.



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If third-party manufacturers of our products fail to devote sufficient time and resources to our
concerns, or if their performance is substandard, our clinical trials and product introductions may be delayed and our costs may rise.



We have no manufacturing facilities, and we have no experience in the commercial manufacturing of drugs and no experience in designing drug manufacturing processes. We
have contracted with third-party manufacturers to produce, in collaboration with us, our product candidates for clinical trials. We intend to rely on third-party contract manufacturers to manufacture, supply, store and distribute any resulting
products.



While we have not experienced problems with our third party
manufacturers to date, our reliance on these third-party manufacturers exposes us to the following risks, any of which could delay or prevent the completion of our clinical trials, the approval of our product candidates by the FDA or other
regulatory agencies, or the commercialization of our products, result in higher costs, or deprive us of potential product revenues:



| |  | Contract manufacturers are obliged to operate in accordance with FDA-mandated current good manufacturing practices, or cGMPs. A failure of any of our contract manufacturers to
establish and follow cGMPs and to document their adherence to such practices may lead to significant delays in the availability of material for clinical trials and may delay or prevent filing or approval of marketing applications for our products.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Changing contract manufacturers may be difficult and the number of potential manufacturers is limited. Changing manufacturers may require re-validation of the manufacturing
processes and procedures in accordance with FDA-mandated cGMPs. Such re-validation may be costly and time-consuming. It may be difficult or impossible for us to find replacement manufacturers on acceptable terms quickly, or at all.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Drug manufacturers are subject to ongoing periodic unannounced
inspections by the FDA and corresponding state and foreign agencies to ensure strict compliance with cGMPs, other government regulations and corresponding foreign standards. We are not aware of any violations by our third-party manufacturers of any
of these regulations or standards. While we are obligated to audit the performance of third-party contractors, we do not have control over our third-party manufacturers compliance with these regulations and standards. Failure by our
third-party manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of the government to grant premarket approval of drugs, delays, suspension or
withdrawal of approvals, seizures or recalls of product, operating restrictions and criminal prosecutions.



We may not be able to manufacture our product candidates in commercial quantities, which would prevent us from commercializing our product
candidates.



To date, our product candidates have been manufactured in
small quantities for preclinical and clinical trials. If any of these product candidates are approved by the FDA or other regulatory agencies for commercial sale, we will need to manufacture them in larger quantities. We may not be able to
successfully increase the manufacturing capacity, whether in collaboration with third party manufacturers or on our own, for any of our product candidates in a timely or economic manner, or at all. Significant scale-up of manufacturing may require
additional validation studies, which the FDA must review and approve. If we are unable to successfully increase the manufacturing capacity for a product candidate, the regulatory approval or commercial launch of that product candidate may be delayed
or there may be a shortage in supply. Our product candidates require precise, high quality manufacturing. Our failure to achieve and maintain these high manufacturing standards, including the incidence of manufacturing errors, could result in
patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously hurt our business.



If we are unable to retain and recruit qualified scientists or if any of our key executives, key employees or key
consultants discontinues his or her employment or consulting relationship with us, it may delay our development efforts.



We are highly dependent on the key members of our management and scientific staff, especially our chief executive officer, Corey Goodman, Ph.D. The loss of any of our key
employees or key consultants could impede the achievement of our development objectives. Furthermore, recruiting and retaining qualified scientific personnel to perform research and development work in the future is critical to our success. We may
be unable to attract and retain personnel on acceptable terms given the competition among biotechnology, pharmaceutical and health care companies, universities and non-profit research institutions for experienced scientists. We maintain key
man insurance on Dr. Goodman. We do not maintain key man insurance policies on any of our other officers or employees. All of our employees are employed at will and, therefore, each employee may leave our employment at
any time.



We have a history of losses and we may never
achieve sustained profitability.



Since our inception, we have
incurred significant net losses, including net losses of $10.9 million and $29.4 million for the three months and nine months ended September 30, 2004 and $50.3 million and $74.2 million for the three and nine months ended September 30, 2003,
respectively. As of September 30, 2004, our cumulative net loss was $111.4 million. We have not yet completed the development, including obtaining regulatory approvals, of any of our product candidates and, consequently, have not generated revenues
from the sale of products and do not expect to do so for at least the next several years. Even if we succeed in developing and commercializing one or more of our product candidates, we expect to incur substantial losses for the foreseeable future.
The development and sale of our products will require completion of clinical trials and significant additional research and development activities. We expect to continue to incur significant operating and capital expenditures and anticipate that our
expenses will increase substantially in the foreseeable future as we:



| |  | continue the development and prepare for commercialization of REN-1654;
| | - | -----------------------------------------------------------------------



| |  | expand our research and development programs; and
| | - | -------------------------------------------------



| |  | advance new product candidates into clinical development from our existing research programs.
| | - | ---------------------------------------------------------------------------------------------



We also expect to experience negative cash flow for the foreseeable future as we fund our operating losses and capital expenditures. We will
need to generate significant revenues to achieve profitability. Our ability to generate revenues and achieve profitability depends on successful completion of clinical trials, our additional research and development efforts, our ability to
successfully commercially introduce our products, market acceptance of our products, the competitive position of our products and the other risk factors set forth in this report. We may not be able to generate these revenues, and we may never
achieve profitability. Our failure to achieve profitability could negatively impact the market price of our common stock. Even if we do become profitable, we may not be able to sustain or increase profitability on a quarterly or annual basis.



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If we cannot raise additional capital on acceptable terms, we may be unable to complete planned
clinical trials, obtain regulatory approvals or commercialize our product candidates.



We believe that existing cash reserves will fund our planned activities through at least the next 24 months. However, we will require substantial future capital in order to continue to conduct the research and
development, clinical and regulatory activities necessary to bring our product candidates to market and to establish commercial manufacturing, sales and marketing capabilities. During the nine months ended September 30, 2004, our net cash used in
operating activities was $18.0 million and we had capital expenditures of $1.5 million for the same period. Our future capital requirements depend on many factors, including:



| |  | the progress of preclinical development and laboratory testing and clinical trials;
| | - | -----------------------------------------------------------------------------------



| |  | the time and costs involved in obtaining regulatory approvals;
| | - | --------------------------------------------------------------



| |  | delays that may be caused by evolving requirements of regulatory agencies;
| | - | --------------------------------------------------------------------------



| |  | the number of product candidates we pursue;
| | - | -------------------------------------------



| |  | the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims;
| | - | ----------------------------------------------------------------------------------------------------------



| |  | our plans to establish sales, marketing and/or manufacturing capabilities;
| | - | --------------------------------------------------------------------------



| |  | our ability to establish, enforce and maintain selected strategic alliances and activities required for product commercialization;
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| |  | the acquisition of technologies or products and other business opportunities that require financial commitments; and
| | - | --------------------------------------------------------------------------------------------------------------------



| |  |  our revenues, if any, from successful development and commercialization of our products.
| | - | ------------------------------------------------------------------------------------------



We intend to seek additional funding through strategic collaborations. We face intense competition from many other companies in the
pharmaceutical and biotechnology industry for corporate collaborations, as well as for establishing relationships with academic and research institutions and for obtaining licenses to proprietary technology. If we are unable to attract and retain
corporate partners to develop, introduce and market our products, our business may be materially and adversely affected. Our strategy and any reliance on corporate partners, if we are able to establish such collaborative relationships, are subject
to additional risks. Our partners may not devote sufficient resources to the development, introduction and marketing of our products or may not pursue further development and commercialization of products resulting from collaborations with us. If a
corporate partner elects to terminate its relationship with us, our ability to develop, introduce and market our products may be significantly impaired and we may be forced to discontinue the product altogether. We may not be able to negotiate
alternative corporate partnership agreements on acceptable terms, if at all. The failure of any future collaboration efforts could have a material adverse effect on our ability to develop, introduce and market our products and, consequently, could
have a material adverse effect on our business, results of operations and financial condition.



In addition to strategic collaborations, we may seek funding through private or public sales of our securities or by licensing all or a portion of our technology. This funding may significantly dilute existing
stockholders or may limit our rights to our technology.



We may not be able to
obtain additional funding on reasonable terms, or at all. If we cannot obtain adequate funds, we may:



| |  | terminate or delay preclinical development or clinical trials for one or more of our product candidates;
| | - | --------------------------------------------------------------------------------------------------------



| |  | delay establishment, or fail to establish, sales, marketing and/or manufacturing capabilities;
| | - | ----------------------------------------------------------------------------------------------



| |  | curtail significant product development programs that are designed to identify new product candidates;
| | - | ------------------------------------------------------------------------------------------------------



| |  | not be in a position to acquire technologies or pursue other business opportunities that require financial commitments; and/or
| | - | ------------------------------------------------------------------------------------------------------------------------------



| |  | relinquish rights to our technologies or product candidates.
| | - | ------------------------------------------------------------



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Risks Related to Our Industry



Claims that we infringe a third-partys intellectual property may give rise to burdensome litigation, result in
potential liability for damages or stop our development and commercialization efforts.



Third parties may assert patent or other intellectual property infringement claims against us or our strategic partners or licensees with respect to technologies used in our potential products. While we have conducted
patent searches to determine whether the technologies used in our products infringe patents held by third parties, we expect that numerous patent applications are currently pending and may be filed in the future for technologies generally related to
our technologies, including many patent applications that remain confidential after filing. Due to these factors and the inherent uncertainty in conducting patent searches, we may violate third-party patent rights that we have not yet identified.



U.S. and foreign patents have been issued to third parties in the same fields
as some of our product candidates. There may also be patent applications filed by these or other parties in the United States and various foreign jurisdictions that are in the same fields as some of our product candidates. These patent applications,
if issued, could subject us to infringement actions. Although we have received communications from a third party alleging that we infringe certain patents held by the third party, we do not believe there is a reasonable basis for an action claiming
that we are infringing any valid and enforceable patents of such third party. To date we have not been subject to any infringement actions.



The owners or licensees of these and other patents may file one or more infringement actions against us. Patent litigation can involve complex factual and legal questions
and its outcome is uncertain. Any claim relating to infringement of patents that is successfully asserted against us may cause us to pay substantial damages. Even if we were to prevail, any litigation could be costly and time-consuming and would
divert the attention of our management and key personnel from our business operations. Furthermore, as a result of a patent infringement suit brought against us or our strategic partners or licensees, we or our strategic partners or licensees may be
forced to stop or delay developing, manufacturing or selling potential products, including Cerovive (NXY-059) or REN-1654, that are claimed to infringe a third partys intellectual property unless that party grants us or our strategic partners
or licensees rights to use its intellectual property. In such cases, we may be required to obtain licenses to patents or proprietary rights of others in order to continue to commercialize our products. However, we may not be able to obtain any
licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all. Even if our strategic partners, licensees or we were able to obtain rights to the third partys intellectual property, these rights may
be non-exclusive, thereby giving our competitors access to the same intellectual property. Ultimately, we may be unable to commercialize some of our potential products or may have to discontinue development of a product candidate, such as Cerovive
(NXY-059) or REN-1654, or cease some of our business operations as a result of patent infringement claims, which could severely harm our business.



We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former
employers.



Many of our employees were previously employed at
universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or
otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in
substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product
could hamper or prevent our ability to commercialize certain product candidates, which could severely harm our business.



If we are unable to protect our intellectual property rights, our competitors may develop and market products with similar features that may reduce
demand for our potential products.



The following factors are
important to our success:



| |  | receiving patent protection for our product candidates;
| | - | -------------------------------------------------------



| |  | not infringing on the intellectual property rights of others;
| | - | -------------------------------------------------------------



| |  | preventing others from infringing our intellectual property rights; and
| | - | -----------------------------------------------------------------------



| |  | maintaining our patent rights and trade secrets.
| | - | ------------------------------------------------



We will be able to protect our intellectual property rights in patents and trade secrets from unauthorized use by third parties only to the extent that such intellectual
property rights are covered by valid and enforceable patents or are effectively maintained as trade secrets.



We try to protect our proprietary position by filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business.
Because the patent position of biotechnology and pharmaceutical companies involves complex legal and factual questions, the issuance, scope and enforceability of patents cannot be predicted with certainty. Patents, if issued, may be challenged,
invalidated or circumvented. U.S. patents and patent applications may also be subject to interference proceedings and U.S. patents may be subject to reexamination proceedings in the U.S. Patent and Trademark Office (and foreign patents may be
subject to opposition or comparable proceedings in the corresponding foreign patent office), which proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the
claims of the patent or patent application. In addition, such interference, reexamination and opposition proceedings may be costly. Thus, any patents that we own or license from others may not provide any protection against competitors. Our pending
patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. If issued, they may not provide us with proprietary protection or competitive advantages against competitors
with similar technology. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. We rely on third-party payment services for the payment of foreign patent annuities and other fees.
Non-payment or delay in payment of such fees, whether intentional or unintentional, may result in loss of patents or patent rights important to our business. Many countries, including certain countries in Europe, have compulsory licensing laws under
which a patent owner may be compelled to grant licenses to third parties (for example, the patent owner has failed to work the invention in that country, or the third party has patented improvements). In addition, many countries limit
the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. Compulsory licensing of life saving drugs
is also becoming increasingly popular in developing countries either through direct legislation or international initiatives. Such compulsory licenses could be extended to include some of our product candidates, which could limit our potential
revenue opportunities. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the aggressive enforcement of patent and other intellectual property protection which makes it difficult to stop
infringement.



In addition, our ability to enforce our patent rights depends on
our ability to detect infringement. It is difficult to detect infringers who do not advertise the compounds that are used in their products. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and
time-consuming and would divert the attention of our management and key personnel from our business operations.



We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. We try to protect this information by
entering into confidentiality agreements with parties that have access to it, such as our strategic partners, collaborators, employees and consultants. Any of these parties



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may breach these agreements and disclose our confidential information or our competitors might learn of the information
in some other way. If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business, financial condition and results of operations could be materially
adversely affected.



Governmental and third-party payors
may impose sales and pharmaceutical pricing restrictions or controls on our potential products that could limit our future product revenues and adversely affect profitability.



The commercial success of our potential products is substantially dependent on whether third-party reimbursement is available for the
ordering of our products by the medical profession for use by their patients. Medicare, Medicaid, health maintenance organizations and other third-party payors may not cover or provide adequate payment for our potential products. They may not view
our potential products as cost-effective and reimbursement may not be available to consumers or may not be sufficient to allow our potential products to be marketed on a competitive basis. Likewise, legislative or regulatory efforts to control or
reduce health care costs or reform government health care programs could result in lower prices or rejection of our potential products. Changes in reimbursement policies or health care cost containment initiatives that limit or restrict
reimbursement for our products may cause our revenue to decline.



Competition in the biotechnology and pharmaceutical industries is intense, and if we fail to compete effectively our financial results will suffer.



Our business is characterized by extensive research efforts, rapid developments and intense competition. Our competitors may have or may
develop superior technologies or approaches to the development of competing products, which may provide them with competitive advantages. Our potential products may not compete successfully. We believe that successful competition in our industry
depends on product efficacy, safety, reliability, availability, timing, scope of regulatory approval, acceptance and price, among other things. Important factors to our success also include speed in developing product candidates, completing clinical
development and laboratory testing, obtaining regulatory approvals and manufacturing and selling commercial quantities of potential products to the market.



We expect competition to increase as technological advances are made and commercial applications broaden. In commercializing our initial product candidates and any
additional product candidates, we will face substantial competition from pharmaceutical, biotechnology and other companies, universities and research institutions.



Many of our competitors have substantially greater capital resources, research and development staffs, facilities and experience in
conducting clinical trials and obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products. Many of our competitors may achieve product commercialization or patent protection earlier than we achieve
commercialization or patent protection, if at all. Furthermore, we believe that some of our competitors have used, and may continue to use, litigation to gain a competitive advantage.



Rapid technological change could make our products obsolete.



Biopharmaceutical technologies have undergone rapid and significant change and we expect
that they will continue to do so. Any compounds, products or processes that we develop may become obsolete or uneconomical before we recover any expenses incurred in connection with their development. Rapid technological change could make our
products obsolete or uneconomical.



We face potential
product liability exposure far in excess of our limited insurance coverage.



The use of any of our product candidates in clinical trials, and the sale of any approved products, may expose us to product liability claims. These claims might be made directly by consumers, health care providers, pharmaceutical companies
or others selling our products. We have obtained limited product liability insurance coverage for our clinical trials in the amount of $5,000,000 per occurrence and $5,000,000 in the aggregate. However, our insurance may not reimburse us or may not
be sufficient to reimburse us for expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us
against losses due to liability. If we obtain marketing approval for any of our product candidates in development, we intend to expand our insurance coverage to include the sale of commercial products, but we may be unable to obtain commercially
reasonable product liability insurance for any products approved for marketing. On occasion, juries have awarded large judgments in class action lawsuits based on drugs that had unanticipated side effects. In addition, the pharmaceutical and
biotechnology industries, in general, have been subject to significant medical malpractice litigation. A successful product liability claim or series of claims brought against us would decrease our cash reserves and could cause our stock price to
fall.



Our activities involve hazardous materials and we
may be liable for any resulting contamination or injuries.



Our
research activities involve the use of hazardous materials. We cannot eliminate the risk of accidental contamination or injury from these materials. If an accident occurs, we may be liable for any resulting damages, which may decrease our cash
reserves and could cause our stock price to fall.



Risks
Related to Our Common Stock



We expect that our stock
price will fluctuate significantly.



Prior to our initial public
offering, you could not buy or sell our common stock publicly. An active public market for our common stock may not develop or be sustained. The stock market, particularly in recent years, has experienced significant volatility particularly with
respect to pharmaceutical and biotechnology stocks. The volatility of pharmaceutical and biotechnology stocks often does not relate to the operating performance of the companies represented by the stock. Factors that could cause this volatility in
the market price of our common stock include:



| |  | the results from our clinical trial programs, including the Phase III clinical trials for Cerovive (NXY-059);
| | - | -------------------------------------------------------------------------------------------------------------



| |  | FDA or international regulatory actions;
| | - | ----------------------------------------



| |  | failure of any of our product candidates, if approved, to achieve commercial success;
| | - | -------------------------------------------------------------------------------------



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| |  | announcements of the introduction of new products by us or our competitors;
| | - | ---------------------------------------------------------------------------



| |  | market conditions in the pharmaceutical and biotechnology sectors;
| | - | ------------------------------------------------------------------



| |  | developments concerning intellectual property rights;
| | - | -----------------------------------------------------



| |  | litigation or public concern about the safety of our potential products;
| | - | ------------------------------------------------------------------------



| |  | comments by securities analysts;
| | - | --------------------------------



| |  | actual and anticipated fluctuations in our quarterly operating results;
| | - | -----------------------------------------------------------------------



| |  | deviations in our operating results from the estimates of securities analysts;
| | - | ------------------------------------------------------------------------------



| |  | rumors relating to us or our competitors;
| | - | -----------------------------------------



| |  | additions or departures of key personnel;
| | - | -----------------------------------------



| |  | third party reimbursement policies; and
| | - | ---------------------------------------



| |  | developments concerning current or future strategic alliances.
| | - | --------------------------------------------------------------



These and other external factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily
selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action
litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.



Future sales of common stock by our existing
stockholders may cause our stock price to fall.



The market price of
our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market, or the perception that these sales could occur. These sales might also make it more difficult for us to sell equity securities
at a time and price that we deem appropriate.



Our
directors and management exercise significant control over our company.



As of September 30, 2004 our directors and executive officers and their affiliates collectively control approximately 35% of our outstanding common stock. These stockholders, if they act together, can influence our management and affairs
and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of our company
and might affect the market price of our common stock.



Provisions of Delaware law or our charter documents could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for you to change management.



Provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. This is because these provisions
may prevent or frustrate attempts by stockholders to replace or remove our current management.



These provisions include:



| |  | a classified board of directors;
| | - | --------------------------------



| |  | a prohibition on stockholder action through written consent;
| | - | ------------------------------------------------------------



| |  | a requirement that special meetings of stockholders be called only by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized directors;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | advance notice requirements for stockholder proposals and nominations;
| | - | ----------------------------------------------------------------------



| |  | a requirement of approval of not less than 662/3% of all outstanding shares of our capital stock entitled to vote to amend any bylaws by stockholder action, or to amend certain provisions of our certificate of incorporation; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | the authority of the Board of Directors to issue preferred stock with such terms as the Board of Directors may determine.
| | - | -------------------------------------------------------------------------------------------------------------------------



As a result, these provisions and others available under Delaware law could limit the price
that investors are willing to pay in the future for shares of our common stock.



We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.



We have paid no cash dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and
growth of our businesses. In addition, the terms of existing debts preclude us from paying these dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.



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Item 3. Quantitative and Qualitative Disclosures about Market Risk



Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term
marketable securities. We maintain an investment portfolio of investment grade, liquid debt securities that limit the amount of credit exposure to any one issue, issuer or type of instrument. Due to the nature of our short-term investments, we
believe that we are not subject to any material market risk exposure. We do not have any foreign currency or other derivative financial instruments.



Item 4. Controls and Procedures



We maintain
disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.



As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information that we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms at the reasonable assurance level.



There has been no change in our internal controls over financial reporting during our most recent quarter that has materially affected, or
is reasonably likely to materially affect, our internal controls over financial reporting.



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Part II. OTHER INFORMATION



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



Our Registration Statement on Form S-1 (Reg. No. 333-109806) in connection with our initial public offerings was declared effective by the SEC on February 4, 2004. We completed our initial public offering on February
10, 2004 for gross proceeds of $75,900,000. The Company paid the underwriters a commission of $5,313,000 and incurred offering expenses of $2,187,000. After deducting the underwriters commission and the offering expenses, the Company received
net proceeds of $68,400,000.



No payments for such expenses were made directly
or indirectly to (i) any of our directors, officers or their associates, (ii) any person(s) owning 10% or more of any class of our equity securities or (iii) any of our affiliates.



The net proceeds have been invested into short-term investment grade securities and money market accounts.



We have begun to use, and intend to continue to use, these proceeds for general corporate
purposes, including clinical trials, research and development expenses, general and administrative expenses and manufacturing expenses.





Item 6. Exhibits



| | (a) | Exhibits:
| | --- | ---------



|              |  |                                                                                  
|------------- |  | ---------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                          
|31.1          |  | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.           
|              | 
|31.2          |  | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.           
|              | 
|32            |  | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer



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SIGNATURES



Pursuant to the requirements of the
Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of the 15th day of November 2004.



Renovis, Inc./s/ John C. DoyleJohn C. DoyleChief Financial Officer and Secretary(Principal financial and accounting officer)




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