UNITED STATESSECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549








FORM 10-Q





(Mark One)


|X| QUARTERLY
  REPORT PURSUANT TO SECTION 13 OR 15(d)


OF


THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended March 31, 2004





OR





|_| TRANSITION
  REPORT PURSUANT TO SECTION 13 OR 15(d)


OF


THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from ___________ to ____________








Commission file number 000-49730





________________________________





DOV PHARMACEUTICAL, INC.


(Exact Name of Registrant as Specified in its Charter)


|Delaware
(State or Other Jurisdiction
of Incorporation or Organization) |  | 22-3374365
(I.R.S. Employer
Identification No.)
|----------------------------------------------------------------------- |  | -----------------------------------------------




Continental Plaza


433 Hackensack Avenue


Hackensack, New Jersey 07601





(Address of principal executive office)








(201) 968-0980


(Registrants telephone number, including area code)





________________________________





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





On April 26, 2004, there were outstanding 18,097,706 shares of our common stock, par value $0.0001 per share.


-1-













DOV PHARMACEUTICAL, INC.





Form 10-Q





For the Quarter Ended March 31, 2004





Table of Contents





PAGE NUMBERPART I -
FINANCIAL INFORMATIONITEM 1.
Financial StatementsConsolidated Balance Sheets as of March 31, 2004 and December 31, 2003
4Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003
5Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003
6Notes to Unaudited Consolidated Financial Statements
7ITEM 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
12ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
17ITEM 4.
Controls and Procedures
17PART II -
OTHER INFORMATIONITEM 1.
Legal Proceedings
18ITEM 2.
Changes in Securities and Use of Proceeds
18ITEM 5.
Other Information
18ITEM 6.
Exhibits and Reports on Form 8-K
28Signatures
29








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Special Note Regarding Forward-Looking Statements





This Report
  on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
  the Securities Exchange Act, each as amended, including statements regarding our expectations with respect to the progress of and level
  of expenses for our clinical trial programs. You can also identify forward-looking statements by the following words: may,
  will, should, expect, intend, plan, anticipate, believe,
  estimate, predict, potential, continue or the negative of these terms or other comparable
  terminology. We caution you that forward-looking statements are inherently uncertain and are simply point-in-time estimates based on
  a combination of facts and factors currently known by us about which we cannot be certain or even relatively confident. Actual results
  or events will surely differ and may differ materially from our forward-looking statements as a result of many factors, some of which
  we may not be able to predict or may not be within our control. Such factors may also materially adversely affect our ability to achieve
  our objectives and to successfully develop and commercialize our product candidates, including our ability to:





- demonstrate the safety and efficacy of product candidates at each stage of development;
- meet our development schedule for our product candidates, including with respect to clinical trial initiation, enrollment and completion;
- meet applicable regulatory standards and receive required regulatory approvals on our anticipated time schedule or at all;
- meet obligations and achieve milestones under our license and other agreements;
- obtain and maintain collaborations as required with pharmaceutical partners;
- obtain substantial additional funds;
- obtain and maintain all necessary patents, licenses and other intellectual property rights; and
- produce drug candidates in commercial quantities at reasonable costs and compete successfully against other products and companies.

You should refer to the Part IIOther Information section of this report under the subheading Item 5. Other Information  Risk Factors and Factors Affecting Forward-Looking Statements for a detailed discussion of some of the factors that may cause our actual results to differ materially from our forward-looking statements. You should also refer to the risks discussed in our other filings with the Securities and Exchange Commission, including those contained in our Annual Report on Form 10-K. We qualify all our forward-looking statements by these cautionary statements. There may also be other material factors that may materially affect our forward-looking statements and our future results. As a result of the foregoing, readers should not place undue reliance on our forward-looking statements. We do not undertake any obligation and do not intend to
update any forward-looking statement.


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PART I  FINANCIAL INFORMATION





ITEM I.Financial Statements





DOV PHARMACEUTICAL, INC.


CONSOLIDATED BALANCE SHEETS





|                                                                                                                                                                                                       |  | December
          31, 
          2003 |             | March 31, 
          2004 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------- | ----------- | ------------------------- | -
|                                                                                                                                                                                                       |  |                                        |             |                           |  
|                                                                                                                                                                                                       |  | (Unaudited)                           
|Assets                                                                                                                                                                                                 |  |                                        |             |                           |  
|Current
          assets:                                                                                                                                                                              |  |                                        |             |                           |  
|Cash and cash equivalents                                                                                                                                                                              |  | $                                      | 22,290,999  |                           | $
|Marketable securities  short-term                                                                                                                                                                     |  |                                        | 26,087,699  |                           |  
|Prepaid expenses and other current assets                                                                                                                                                              |  |                                        | 1,197,973   |                           |  
|                                                                                                                                                                                                       |  |                                        |             |                           |  
|Total current assets                                                                                                                                                                                   |  |                                        | 49,576,671  |                           |  
|Marketable
          securities  long-term                                                                                                                                                            |  |                                        | 3,783,227   |                           |  
|Property
          and equipment, net                                                                                                                                                                  |  |                                        | 364,950     |                           |  
|Deferred
          charges, net                                                                                                                                                                        |  |                                        | 127,012     |                           |  
|                                                                                                                                                                                                       |  |                                        |             |                           |  
|Total assets                                                                                                                                                                                           |  | $                                      | 53,851,860  |                           | $
|                                                                                                                                                                                                       |  |                                        |             |                           |  
|Liabilities
          and Stockholders Equity                                                                                                                                                         |  |                                        |             |                           |  
|Current
          liabilities:                                                                                                                                                                         |  |                                        |             |                           |  
|Accounts payable                                                                                                                                                                                       |  | $                                      | 1,839,655   |                           | $
|Accrued expenses                                                                                                                                                                                       |  |                                        | 1,220,814   |                           |  
|                                                                                                                                                                                                       |  |                                        |             |                           |  
|Total current liabilities                                                                                                                                                                              |  |                                        | 3,060,469   |                           |  
|                                                                                                                                                                                                       |  |                                        |             |                           |  
|Convertible
          promissory note                                                                                                                                                                  |  |                                        | 11,254,566  |                           |  
|Convertible
          line of credit promissory note                                                                                                                                                   |  |                                        | 3,631,532   |                           |  
|Commitments
          and contingencies                                                                                                                                                                |  |                                        |             |                           |  
|Stockholders
          equity:                                                                                                                                                                        |  |                                        |             |                           |  
|Preferred
          stockseries B, $1.00 par value, 354,643 shares authorized, 354,643 shares issued and outstanding at December 31, 2003
          and none issued and outstanding at March 31, 2004 |  |                                        | 354,643     |                           |  
|Preferred
          stockundesignated preferred stock, $1.00 par value, 6,550,357 shares authorized, none issued and outstanding at December
          31, 2003 and March 31, 2004                    |  |                                        |            |                           |  
|Common
          stock, $.0001 par value, 60,000,000 shares authorized, 16,494,293 issued and outstanding at December 31, 2003 and 18,058,753
          issued and outstanding at March 31, 2004       |  |                                        | 1,649       |                           |  
|Additional paid-in capital                                                                                                                                                                             |  |                                        | 103,013,813 |                           |  
|Accumulated other comprehensive gain (loss)                                                                                                                                                            |  |                                        | (28,228     | )                         |  
|Accumulated deficit                                                                                                                                                                                    |  |                                        | (67,396,482 | )                         |  
|Unearned compensation                                                                                                                                                                                  |  |                                        | (40,102     | )                         |  
|                                                                                                                                                                                                       |  |                                        |             |                           |  
|Total stockholders equity                                                                                                                                                                             |  |                                        | 35,905,293  |                           |  
|                                                                                                                                                                                                       |  |                                        |             |                           |  
|Total liabilities and stockholders equity                                                                                                                                                             |  | $                                      | 53,851,860  |                           | $
|                                                                                                                                                                                                       |  |                                        |             |                           |  




The accompanying notes are an integral part of these consolidated financial statements.


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DOV PHARMACEUTICAL, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


Three Months EndedMarch 31,2003
          
          
          2004(Unaudited)Revenue
          
          $
          2,968,750
          
          $
          Operating expenses:License expense
          
          
          1,000,000
          
          
          Research and development expense
          
          
          3,260,457
          
          
          5,509,292General and administrative expense
          
          
          1,255,353
          
          
          1,257,382Loss from operations
          
          
          (2,547,060
          )
          
          (6,766,674
          )Interest income
          
          
          237,094
          
          
          157,893Interest expense
          
          
          (436,258
          )
          
          (1,081,366
          )Other income, net
          
          
          135,968
          
          
          455Net loss
          
          $
          (2,610,256
          )
          $
          (7,689,692
          )Basic and diluted net loss per share
          
          $
          (0.18
          )
          $
          (0.46
          )Weighted average shares used in computing basic and diluted net loss per share
          
          
          14,476,825
          
          
          16,700,740





The accompanying notes are an integral part of these consolidated financial statements.





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DOV PHARMACEUTICAL, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS







**Three Months Ended
          March 31,**2003
        
        2004(Unaudited)Cash flows from operating activitiesNet loss
        
        $
        (2,610,256
        )
        $
        (7,689,692
        )Adjustments to reconcile net loss to net cash used in operating activities:License expense
        
        
        1,000,000
        
        
        Decrease in non-cash litigation settlement expense
        
        
        (504,269
        )
        
        Non-cash amortization of premium paid on marketable securities and depreciation in                     investments
        
        
        574,148
        
        
        274,523Non-cash interest expense
        
        
        435,779
        
        
        1,081,366Depreciation
        
        
        37,747
        
        
        50,442Amortization of deferred charges
        
        
        6,937
        
        
        29,310Non-cash compensation charges
        
        
        159,750
        
        
        17,443Warrants, options and common stock issued for services
        
        
        (16,762
        )
        
        109,245Changes in operating assets and liabilities:Receivable from DOV Bermuda (Elan Portion)
        
        
        181,302
        
        
        Prepaid expenses and other current assets
        
        
        135,362
        
        
        426,700Accounts payable
        
        
        (432,247
        )
        
        417,034Accrued expenses
        
        
        360,460
        
        
        1,028,502Deferred revenue
        
        
        (2,968,750
        )
        
        Net cash used in operating activities
        
        
        (3,640,799
        )
        
        (4,255,127
        )Cash flows from investing activitiesPurchases of marketable securities
        
        
        (5,511,569
        )
        
        (8,162,482
        )Sales of marketable securities
        
        
        3,500,000
        
        
        8,150,000Purchases of property and equipment
        
        
        (17,291
        )
        
        (90,455
        )Net cash used in investing activities
        
        
        (2,028,860
        )
        
        (102,937
        )Cash flows from financing activitiesProceeds from issuance of stock, net of costs
        
        
        
        
        
        9,965,005Proceeds from options exercised
        
        
        227,000
        
        
        324,218Net cash provided by financing activities
        
        
        227,000
        
        
        10,289,223Net increase (decrease) in cash and cash equivalents
        
        
        (5,442,659
        )
        
        5,931,159Cash and cash equivalents, beginning of period
        
        
        37,868,509
        
        
        22,290,999Cash and cash equivalents, end of period
        
        $
        32,425,850
        
        $
        28,222,158





The accompanying notes are an integral part of these consolidated financial statements.





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DOV PHARMACEUTICAL, INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





1. The Company





Organization





DOV Pharmaceutical, Inc. (the Company) was incorporated in May 1995 in New Jersey and reincorporated in Delaware in November 2000.





The Company is a biopharmaceutical company focused on the discovery, in-licensing, development and commercialization of novel drug candidates for central nervous system and other disorders, including cardiovascular, that involve alterations in neuronal processing. The Company has six product candidates in clinical trials targeting insomnia, anxiety disorders, pain, depression and angina and hypertension. The Company has established strategic alliances with select partners to access their unique technologies and their commercialization capabilities. The Company operates principally in the United States but it also conducts clinical studies in Canada and Europe.





2. Significant Accounting Policies





Basis of Presentation





The financial statements are presented on the basis of accounting principles that are generally accepted in the United States for interim financial information and in accordance with the instructions of the Securities and Exchange Commission (SEC) on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented.





The results of operations for the interim periods shown in this report are not necessarily indicative of results expected for the full year. The financial statements should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2003, included in our Annual Report on Form 10-K filed with the SEC.








Use of Estimates





The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported assets, liabilities, revenues, earnings, financial position and various disclosures. Actual results could differ from those estimates.





Deferred Charges





Deferred charges are comprised of issuance costs for the convertible promissory note and the convertible line of credit promissory note and are being amortized over the six-year term of the instruments, ending in January 2005, and the issuance of 75,000 warrants to Elan International Services, Ltd. (EIS), a wholly-owned subsidiary of Elan, in connection with the amendment to the convertible promissory note, that is being amortized over the remaining term of the note, ending in January 2005. In April 2004, EIS exercised these warrants utilizing the net share settlement provision in the warrant agreement, resulting in a net issuance of 36,479 shares of the Companys common stock.





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Net Loss Per Share





Basic and diluted net loss per share have been computed using the weighted-average number of shares of common stock outstanding during the period. The Company has excluded the shares issuable on conversion of the convertible promissory note, the convertible line of credit promissory note, convertible preferred stock, outstanding options and warrants to purchase common stock from the calculation of diluted net loss per share, as such securities are antidilutive for each period presented.








|                                                                                          |  | Three Months Ended March 31,
|----------------------------------------------------------------------------------------- |  | ----------------------------
|                                                                                          |  |                             
|                                                                                          |  | 2003                        
|                                                                                          |  |                             
|                                                                                          |  | (Unaudited)                 
|Net loss                                                                                  |  | $                           
|                                                                                          |  |                             
|Basic and diluted:                                                                        |  |                             
|Weightedaverage shares used in computing basic and diluted net loss per share            |  |                             
|                                                                                          |  |                             
|Basic and diluted net loss per share                                                      |  | $                           
|                                                                                          |  |                             
|Antidilutive securities not included in basic and diluted net loss per share calculation: |  |                             
|Convertible preferred stock                                                               |  |                             
|Convertible promissory note                                                               |  |                             
|Convertible line of credit promissory note                                                |  |                             
|Options                                                                                   |  |                             
|Warrants                                                                                  |  |                             
|                                                                                          |  |                             
|                                                                                          |  |                             
|                                                                                          |  |                             




Comprehensive Loss





|                                                                       |  | Three
          Months Ended
          March 31,
|---------------------------------------------------------------------- |  | ------------------------------------------------
|                                                                       |  |                                                 
|                                                                       |  | 2003                                            
|                                                                       |  |                                                 
|                                                                       |  | (Unaudited)                                     
|Net loss                                                               |  | $                                               
|Reclassification for losses included in net loss                       |  |                                                 
|Net unrealized gains (losses) on marketable securities and investments |  |                                                 
|                                                                       |  |                                                 
|Comprehensive loss                                                     |  | $                                               
|                                                                       |  |                                                 




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Stock-Based Compensation





The Company accounts for stock-based compensation expense for options granted to employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and has adopted the disclosure only alternative of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123).





If the Company had elected to recognize compensation expense based upon the fair value at the date of grant for awards under these plans, consistent with the methodology prescribed by SFAS 123, the effect on the Companys net loss would be as follows:





|                                                                                                                |  | Three Months Ended March 31,
|--------------------------------------------------------------------------------------------------------------- |  | ----------------------------
|                                                                                                                |  |                             
|                                                                                                                |  | 2003                        
|                                                                                                                |  |                             
|                                                                                                                |  | (Unaudited)                 
|Net loss as reported                                                                                            |  | $                           
|Add: total stock-based employee compensation expense determined under APB No. 25                                |  |                             
|Deduct: total stock-based employee compensation expense determined under fair value based method for all awards |  |                             
|                                                                                                                |  |                             
|Pro forma                                                                                                       |  | $                           
|                                                                                                                |  |                             
|Basic and diluted net loss per share:                                                                           |  |                             
|As reported                                                                                                     |  | $                           
|                                                                                                                |  |                             
|Pro forma                                                                                                       |  | $                           
|                                                                                                                |  |                             




For purposes of the computation of the pro forma effects on the net loss above, the fair value of each employee option is estimated using the Black-Scholes option pricing model and the following assumptions:





|                        |  | Three
          Months Ended
          March 31,
|----------------------- |  | ------------------------------------------------
|                        |  |                                                 
|                        |  | 2003                                            
|                        |  |                                                 
|Risk-free interest rate |  |                                                 
|Expected lives          |  |                                                 
|Expected dividends      |  |                                                 
|Expected volatility     |  |                                                 




Concentration of Credit Risk





Cash and cash equivalents are invested in deposits with significant financial institutions. The Company has not experienced any losses on its deposits of cash and cash equivalents. Management believes that the financial institutions are financially sound and, accordingly, minimal credit risk exists. Approximately $12.1 million of the Companys cash balance was uncollateralized at March 31, 2004.





Recent Accounting Pronouncements





In December 2003, the FASB reissued FASB Interpretation No. 46 (FIN 46R), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 with certain modifications and clarifications. Application of this guidance was effective for interests in certain variable interest entities commonly referred to as special purpose entities and for variable interest entities created or acquired after February 1, 2003 as of December 31, 2003. Application for all other types of variable interest entities created after February 1, 2003 is required for the period ended after March 15, 2004 unless previously applied. The Company adopted the revised interpretation of FIN 46 and it did not have a material effect on the Companys financial position or results of operations.





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Risks and Uncertainties
The Company is subject to risks common to companies in the biopharmaceutical industry, including but not limited to successful commercialization of product candidates, protection of proprietary technology and compliance with FDA regulations. The Companys convertible promissory note and convertible line of credit promissory note mature on January 20, 2005, at which time the principal amount and unpaid accrued interest become due and payable. At anytime prior to the date the notes are paid in full, the holders have the right to convert the outstanding principal and unpaid accrued interest amount of the convertible promissory note and the convertible line of credit promissory note into shares of its common stock at $3.98 per share and $3.41 per share, respectively. If in January 2005 the note holders choose to have the notes repaid in cash, the Company will be required to pay


 approximately $16.1 million to them and if it has not raised additional capital, curtail operations until it raises additional capital. 3. Research and Development Expense





Research and development costs are expensed when incurred and include allocations for payroll and related costs and other corporate overhead.





The following represents a detail of amounts included in research and development expense:





|                                                |  | Three
        Months Ended March 31,
|----------------------------------------------- |  | ------------------------------------
|                                                |  |                                     
|                                                |  | 2003                                
|                                                |  |                                     
|                                                |  | (Unaudited)                         
|Payroll
        related and associated overhead |  | $                                   
|Clinical
        and preclinical trial costs    |  |                                     
|Professional
        fees                       |  |                                     
|                                                |  |                                     
|Total
        research and development expense  |  | $                                   
|                                                |  |                                     




4. Marketable Securities and Investments





At March 31, 2004, the Company held securities, classified as available-for-sale, with a market value of $29.6 million. These securities consist primarily of corporate debt securities and government and federal agency bonds. The Company also had short-term investments in municipal bonds, money market, negotiable certificates of deposits, and auction rate paper, with maturity dates of three months or less when purchased, as a component of cash and cash equivalents, of $10.5 million. The Company does not purchase financial instruments for trading or speculative purposes.





5. Equity Transactions





On March 31, 2004, the holder of all the Companys outstanding series B preferred stock converted all 354,643 shares of series B preferred stock into 574,521 shares of the Companys common stock.





On
  March 29, 2004, the Company concluded a private placement of 666,667 shares of common stock to an institutional investor for $10.0 million.
  Pursuant to the securities purchase agreement and a registration rights agreement, the Company filed a registration statement for the
  registrable securities, which was declared effective on April 15, 2004.


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6. Biovail License
 
 On March 28, 2003, the Company entered into a separation agreement with Biovail that provided for the return of the Companys December 2000 patent for the immediate and controlled release of diltiazem and termination of the 2001 exclusive license agreement with Biovail for development of the DOV compound for the treatment of angina and hypertension. In consideration of the termination of the 2001 agreement and the return of the patent, DOV agreed to a $1.0 million payment to Biovail upon signing, contingent payments to Biovail of $3.0 million upon receipt of marketing authorization for the drug and up to a maximum of $7.5 million based upon sales. The Company recorded a charge for the $1.0 million signing payment in the first quarter of 2003. This payment was to obtain the patent and related clinical data from Biovail. As this product will require FD

A
approval prior to marketing and the patent has no alternative further use, the Company expensed the entire license fee. As the separation agreement ends DOVs performance obligations, the agreement also resulted in the recognition in the first quarter of the remaining deferred revenue, totaling approximately $3.0 million as of December 31, 2002, of the original $7.5 million license fee paid to DOV. In addition, as a result of the separation agreement, Biovail and DOV also agreed to release any and all claims.
 7. Litigation





From April 30, 2002, a number of class action lawsuits were filed naming as defendants the Company, certain of the Companys officers and directors and certain of the underwriters in the Companys April 24, 2002 initial public offering of 5,000,000 shares of its common stock. The lawsuits were based upon the Companys alleged failure to disclose the filing of a revised registration statement and prospectus for the Companys initial public offering reflecting changes to the 1999 financial statements of the Companys joint venture with Elan, DOV (Bermuda), Ltd. These class actions were brought on behalf of purchasers of the Companys common stock in or traceable to the Companys initial public offering and sought money damages or rescission. On December 20, 2002, the Company entered into an agreement, which was approved by the court on April 16, 2003,


 to settle these lawsuits. In connection with these securities class action lawsuits, the Companys providers of primary and excess liability insurance for directors and officers, D&O, asserted that the policy binders they issued in connection with the Companys initial public offering were not effective because, among other reasons, they never approved the documentation provided with the policy application, including the final registration statement, and that such approval is a prerequisite to their policies effectiveness. The Company strongly disagreed with their positions, advised the carriers that the Company intended to hold them to their original binder terms as the Company vigorously pursued resolution of these matters, and initiated arbitration against the primary D&O carrier. The Company reached agreement with the excess D&O carrier that, for claims other than the securities class action lawsuits described above, the excess D&O policy would remain in place, effective


for losses in excess of $10.3 million. In April 2003, prior to commencement of arbitration, the Company and the primary carrier reached a settlement. Under the settlement terms, the carrier paid the Company approximately $1.6 million. The insurance recovery was recorded in the second quarter of 2003 as other income.





From time to time and in the ordinary course of business, the Company may be subject to various claims, charges and litigation. In the opinion of management, final judgments from such pending claims, charges, and litigation, if any, against the Company, would not have a material adverse effect on its financial position, result of operations, or cash flows.





8. Amendment to Agreements





On February
  25, 2004, the Company entered into agreements to reorganize its exclusive license agreement with Wyeth and its sublicense agreement
  with Neurocrine in respect of indiplon. The restated agreement with Wyeth amends among other items, the financial obligations due to
  Wyeth in respect of bicifadine, ocinaplon and DOV 216,303 such that the Company is now obligated to pay a fixed royalty percentage and
  fixed milestone payments. The restated agreement provides that if the Company sells the product itself, the Company will be obligated
  to pay Wyeth 3.5% of net sales for ocinaplon and DOV 216,303 and 5.0% of net sales for bicifadine, and potential aggregate milestones
  of $7.0 million for ocinaplon and DOV 216,303 and $9.5 million for bicifadine. The royalty rate for bicifadine, ocinaplon and DOV 216,303
  will increase by 0.5% should the Company partner or sublicense that compound, in which case the next milestone payable to Wyeth for
  that compound will be accelerated to become due upon partnering. In addition, if before February 25, 2005 the Company enters into an
  agreement that effects a change of control of the Company, then the Company will be obligated to pay Wyeth $10.0 million upon such change
  of control.





As noted above, on February 25, 2004, the Company entered into agreements to reorganize its sublicense agreement with Neurocrine. The restated agreement provides for a royalty term of the last to expire of Wyeth patents or any patent owned or controlled by Neurocrine covering indiplon and ten years. As part of the reorganization, Neurocrine acquired Wyeths interest under the license covering indiplon. Accordingly, the reorganization with Neurocrine allows Neurocrine to pay to DOV royalty and milestone payments net of those amounts that would be owed by the Company to Wyeth under the earlier agreement. The Companys economics will therefore remain unchanged and it will continue to be entitled to receive $3.5 million in aggregate milestones upon Neurocrines NDA filing and approval and 3.5% royalty on worldwide sales.


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





You should
  read the following discussion of our results of operations and financial condition together with our unaudited financial statements
  and related notes contained elsewhere in this quarterly report.





Overview





We are a biopharmaceutical company focused on the discovery, in-licensing, development and commercialization of novel drug candidates for central nervous system, or CNS, and other disorders, including cardiovascular, that involve alterations in neuronal processing. In 1998, we licensed four of our product candidates from Wyeth: indiplon, for the treatment of insomnia, bicifadine, for the treatment of pain, ocinaplon, for the treatment of anxiety, and DOV 216,303, for the treatment of depression. We sublicensed indiplon to Neurocrine in 1998 in exchange for the right to receive payments upon the achievement of certain clinical development milestones and royalties based on product sales, if any. Neurocrine has subsequently entered into a development and commercialization agreement with Pfizer for indiplon.





Since our inception, we have incurred significant operating losses and we expect to do so for the foreseeable future. As of March 31, 2004, we had an accumulated deficit of $75.1 million. We have depended upon equity and debt financings and license fee and milestone payments from our collaborative partners and licensees to fund our research and product development programs and expect to do so for the foreseeable future.





We have a relatively limited history of operations and anticipate that our quarterly results of operations will fluctuate for several reasons, including the timing and extent of research and development efforts, the timing and extent of adding new employees and infrastructure, the timing of milestone, license fee and royalty payments and the timing and outcome of regulatory approvals.





Our revenue has consisted primarily of license fees and milestone payments from our collaborative partners and licensees. We record revenue on an accrual basis when amounts are considered collectible. Revenue received in advance of performance obligations, or in cases where we have a continuing obligation to perform services, is deferred and amortized over the performance period. Revenue from milestone payments that represent the culmination of a separate earnings process is recorded when the milestone is achieved. Contract revenues are recorded as the services are performed. License and milestone revenue are typically not consistent or recurring in nature. Our revenue has fluctuated from year-to-year and quarter-to-quarter and this will likely continue.





Our operating
  expenses consist primarily of license expense, costs associated with research and development and general and administrative costs associated
  with our operations. License expense consists of milestone payments accrued and paid under our license agreement with Wyeth and license
  fees paid in connection with the termination of the 2001 Biovail agreement. Research and development expense consists primarily of compensation
  and other related costs of our personnel dedicated to research and development activities, as well as outside clinical trial expenses
  and professional fees related to clinical trials, toxicology studies and preclinical studies. Research and development expense also
  includes our expenses related to development activities of DOV Bermuda and Nascime Limited, our wholly-owned subsidiary. General and
  administrative expense consists primarily of the costs of our senior management, finance and administrative staff, business insurance,
  professional fees and costs associated with being a public reporting entity.





We expect research and development expense to increase substantially in the foreseeable future. We expect that a large percentage of this will be incurred in support of our clinical trial programs and toxicology studies for bicifadine,DOV 21,947, DOV diltiazem and, subject to the FDAs releasing its clinical hold placed upon our planned phase III clinical trial, ocinaplon, as well as our product candidates in our preclinical program if they progress into clinical trials. In the third quarter of 2004, we intend to initiate two pivotal Phase III clinical trials for bicifadine and a Phase II efficacy clinical trial for DOV 21,947. DOV 51,892 and DOV 102,677, currently in our preclinical program, have been designated as clinical candidates and we therefore expect to incur additional expenditures on these two product


 candidates in 2004.





In January 1999,
  we entered into a joint venture with Elan. As part of the transaction, we formed DOV Bermuda to develop controlled release formulations
  of ocinaplon and bicifadine. As of January 1, 2003, we owned 80.1% of the outstanding common stock of DOV Bermuda. However, Elan
  retained significant minority investor rights that were treated as participating rights as defined in Emerging Issues Task
  Force Consensus, or EITF, No. 96-16 Investors Accounting for an Investee When the Investor Has a Majority of the Voting
  Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights. Therefore, prior to December 31,
  2002, we did not consolidate the financial statements of DOV Bermuda, but instead accounted for our investment in DOV Bermuda under
  the equity method of accounting. We recorded our 80.1% interest in the loss in DOV Bermuda as research and development expense for the
  portion of the research and development expense incurred by us on behalf of DOV Bermuda and as loss in investment in DOV Bermuda for
  our 80.1% interest in the remaining loss of DOV Bermuda, including that attributable to research and development expense of Elan. As
  Elans rights to participate in the management of the joint venture expired as of January 2003, we have consolidated 100%
  of the results of DOV Bermuda as of January 1, 2003. Additionally, since Elan is no longer funding DOV Bermuda, we are recording
  100% of the loss of DOV Bermuda effective January 1, 2003. After funding the first and second quarter of 2003 loss, following which
  operational funding of DOV Bermuda caused our equity ownership in the joint venture increased to 83.0% from 80.1%.





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On October 21, 2003, we entered into an agreement with Elan to acquire 100% ownership of Nascime Limited, the joint ventures operating company, formed by Elan and us in January 1999 to develop bicifadine and ocinaplon. In connection with the acquisition, we paid $5.0 million to a subsidiary of Elan in respect of its 17% equity stake in the joint venture. Elan granted to the operating company a non-exclusive, royalty-free, perpetual, worldwide license to make and sell the two product candidates in controlled release formulations using the Elan intellectual property licensed to the joint venture, including that developed during the venture. In connection with the license grant, Elan will be entitled to receive up to an aggregate of $3.0 million when the products are licensed or come to market. This acquisition ends Elans involvement in the nearly five-yea

r joint
venture established to develop controlled release formulations of ocinaplon and bicifadine. DOV Bermuda, the joint venture holding company, will remain in existence and the results of DOV Bermuda will continue to be consolidated. However, as a result of the acquisition of 100% of Nascime, DOV Bermuda is not expected to incur additional research and development expenses and virtually no assets remain within the entity.





In January 1999, Elan loaned us $8.0 million in the form of a 7% convertible promissory note to fund our investment in DOV Bermuda. Elan has the right to convert the outstanding principal amount of this note at any time, together with accrued unpaid interest, into shares of our common stock at $3.98 per share. Alternatively, prior to January 1, 2003, Elan could exchange the principal portion of the note for an additional equity interest in DOV Bermuda such that our equity interests would be equal. This would have resulted in our transferring a portion of the shares we hold to Elan. We accounted for this exchange feature in accordance with EITF 86-28 Accounting Implications of Indexed Debt Instruments. This required us to record an additional liability for this feature if the value of the interest Elan could obtain in the joint venture was more than the principal amoun

t of the
note. Since we issued this note to Elan, this feature did not result in any interest expense and, as described below, in March 2003, the exchange feature of the note was eliminated. The note may not be prepaid without Elans prior written consent. To the extent Elan has not converted the note, the unpaid principal and accrued interest are due and payable on January 20, 2005.





Elan agreed, in January 1999, to lend us up to $7.0 million to fund our pro rata share of research and development funding in DOV Bermuda. For this purpose, we issued to Elan a convertible line of credit promissory note that bears interest at 10% per annum compounded semi-annually on the amount outstanding. This convertible line of credit promissory note matures on January 20, 2005, at which time the principal amount and accrued unpaid interest become due and payable. The convertible line of credit promissory note may not be prepaid by us without Elans prior written consent. At any time prior to the date the convertible line of credit promissory note is repaid in full, Elan has the right to convert the outstanding principal and accrued unpaid interest of the convertible line of credit promissory note into shares of our common stock at $3.41 per share. Our ability to bo

rrow
further under the convertible line of credit promissory note expired in March 2002.





On March 24, 2003, we entered into an agreement with Elan to amend the convertible promissory note originally issued by us to EIS in January 1999 to eliminate the exchange right feature of this note. All other significant terms of the note remain unchanged. In connection with this amendment, EIS received warrants to purchase 75,000 shares of our common stock at an exercise price of $10.00 per share. These warrants were due to expire on January 21, 2006. As of March 24, 2003, we determined the fair value of the warrants at $164,000.  In April 2004, EIS exercised these warrants utilizing the net share settlement provision in the warrant agreement, resulting in a net issuance of 36,479 shares of our common stock.





In January 2001, Biovail and we entered into a license, research and development agreement to develop, manufacture and market DOV diltiazem for the treatment of angina and hypertension. Through January 2003, DOV diltiazem was being jointly developed through the collaborative arrangement. On March 28 2003, we entered into a separation agreement with Biovail that provided for the return of our December 2000 patent for the immediate release and controlled release formulations of diltiazem and termination of the 2001 exclusive license agreement with Biovail for the development of DOV diltiazem.





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In October 2003,
  the FDA placed the start of our Phase III pivotal clinical trial of ocinaplon, our anti-anxiety product candidate, on hold and requested
  that we produce additional safety information. We submitted a response to the FDA and have requested that the agency lift its clinical
  hold.  In April 2004, we received notice from the Division of Neuropharmacological Drug Products
  at the FDA that it is willing to meet with us to discuss the continued clinical hold of ocinaplon. The meeting is scheduled for late
  June 2004. We cannot assure you that we have submitted or will be able to submit all information expected by the FDA or further information
  that may be requested by the FDA, or that any information we do provide will be satisfactory to the FDA, or that the FDA will release
  the hold placed by it on the commencement of our Phase III pivotal clinical trial of ocinaplon or any revised clinical study designed
  to respond to the FDAs safety concerns.





Results
  of Operations





Three Months Ended March 31, 2004 and 2003





Revenue. We earned no revenue in the first quarter of 2004. Our revenue for the first quarter of 2003 of $3.0 million was comprised solely of the recognition of $3.0 million of deferred revenue. On March 28, 2003 we entered into a separation agreement with Biovail that provided for the return of our December 2000 patent for the immediate and controlled release of diltiazem and termination of the 2001 exclusive license agreement with Biovail for development of the DOV compound for the treatment of angina and hypertension. As the separation agreement ends our performance obligations, we recognized the remaining deferred revenue, totaling $3.0 million as of December 31, 2002, as revenue in the first quarter of 2003. We will not record any additional revenue from Biovail for this product.





License Expense. In connection with the termination of the 2001 Biovail agreement and the return of the patent as described above, we agreed to a $1.0 million payment to Biovail upon signing. This payment was to obtain the patent and related clinical data from Biovail. As this product will require FDA approval prior to marketing and the patent has no alternative further use, we expensed the entire license fee. Thus in the first quarter of 2003, we recorded royalty and licensing expense of $1.0 million.








Research
  and Development Expense. Research and development expense increased $2.2 million to $5.5 million for the first quarter 2004 from
  $3.3 million for the comparable period in 2003. $1.2 million of the increase in research and development expense was associated with
  increased clinical development costs of $1.1 million for bicifadine, $153,000 for DOV 51,892, $141,000 for DOV diltiazem, and $34,000
  for DOV 102,677 offset by a decrease in clinical development costs of $139,000 for DOV 216,303 and $60,000 for DOV 21,947. Payroll and
  associated overhead related to research and development increased $793,000 due primarily to an increase in salary and bonuses of $416,000
  related primarily to an increase in personnel and a lump sum retirement obligation to our co-founder Dr. Bernard Beer of $377,000 who
  retired on March 15, 2004. Professional fees related to research and development increased $201,000 primarily due to an increase in
  non-cash stock compensation to outside consultants of $120,000 and $81,000 of legal fees related to patent filings.





General and Administrative Expense. General and administrative expense was virtually unchanged from the prior period. Office and related expenses increased $179,000 but was offset by a decrease in professional fees of $157,000 and decreased payroll and related overhead of $20,000. The increase in office and related expenses was primarily attributable to increased directors and officers insurance premiums of $80,000, increased travel and entertainment expense of $43,000, increased depreciation of $27,000 and increased fees and other expenses of $29,000. The decrease in professional fees is primarily related to a decrease in legal fees of $163,000. In the three months ended March 31, 2003 legal fees included fees associated with amending the Elan convertible note as discussed above and resolving the shareholder lawsuits as described in Note 7 to our financial
statements included under Part I, ITEM 1 of this Form 10-Q. The decrease in payroll and related overhead was primarily attributable to a decrease in non-cash stock based compensation to employees of $131,000 offset by an increase in salary and bonuses of $111,000.





Interest Income. Interest income decreased $79,000 to $158,000 in the first quarter 2004 from $237,000 in the comparable period in 2003 primarily due to lower average cash balances and a lower effective interest rate yield.





Interest Expense. Interest expense increased $645,000 to $1.1 million in the first quarter 2004 from $436,000 in the comparable period in 2003. We recorded interest expense of $288,000 on our convertible promissory note and convertible line of credit promissory note with Elan in the first quarter of 2004 and $266,000 in the comparable period in 2003. This increase was due to higher outstanding balances, attributable wholly to accrued interest, on the convertible promissory note and the convertible line of credit promissory note. Both the Elan convertible promissory note and convertible line of credit promissory note contain interest that will be paid either in cash or common stock at Elans option. In accordance with EITF 00-27, we evaluate this conversion feature each time interest is accrued to the notes. This feature resulted in interest expense of $794,000 for the firs

t
quarter of 2004, an increase of $624,000 from the first quarter of 2003, due primarily to the increase in the fair value of our common stock. To the extent the value of our common stock is at or above $3.98 per share with respect to the convertible promissory note or $3.41 per share with respect to the convertible line of credit promissory note, we will continue to incur additional interest expense each time interest is accrued on the notes.





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Other Income, net. Other income, net decreased $135,000 to $500 in the first quarter of 2004 from $136,000 in net income in the comparable period in 2003. In the first quarter of 2003, other income, net consisted of a decrease in the estimated value of warrants anticipated to be issued as part of a settlement for the class action lawsuit by shareholders resulting in other income of $504,000, offset by a decrease in the value of the warrants to acquire Neurocrine common stock resulting of $251,000 and an increase in foreign exchange loss of $26,000.





Liquidity and Capital Resources








At March 31, 2004, our cash and cash equivalents and marketable securities totaled $57.9 million compared with $52.2 million at December 31, 2003. The increase in cash balances at March 31, 2004 resulted primarily from the completion of a $10.0 million financing offset by the funding of our operations during the three months ended March 31, 2004. At March 31, 2004, we had working capital of $47.2 million.





Net cash used in operations during the three months ended March 31, 2004 and 2003 amounted to $4.3 million and $3.6 million, respectively. The increase in cash used in operations resulted primarily from the increase in clinical development activities and the addition of personnel. Net cash used in operations benefited from an increase in accounts payable and accrued liabilities of $1.4 million due to an increase in volume and timing of payments. Non-cash expenses related to stock-based compensation, interest expense and depreciation and amortization expenses were $1.3 million in the three months ended March 31, 2004 and $623,000 in the comparable period in 2003.





Net cash provided by financing activities was $10.3 million during the three months ended March 31, 2004 related to proceeds from the sale of common stock to an institutional investor and the exercise of options to purchase common stock.





We believe that our existing cash and cash equivalents will be sufficient to fund our anticipated operating expenses, debt obligations and capital requirements until at least the end of 2004. Our convertible promissory note and our convertible line of credit promissory note mature on January 20, 2005, at which time the principal amount and unpaid accrued interest become due and payable. At anytime prior to the date either of the notes are paid in full, the holders of the notes have the right to convert the outstanding principal and unpaid accrued interest amount of the convertible promissory note and the convertible line of credit promissory note into shares of our common stock at $3.98 per share and $3.41 per share, respectively. If in January 2005 the note holders choose to have the notes repaid in cash, we will be required to pay them approximately $16.1 million and if we have


 not raised additional capital, to curtail operations until we raise additional capital. Our future capital uses and requirements depend on numerous factors, including:





our progress with research and development;our ability to establish and the scope of any new collaborations;the progress and success of clinical trials and preclinical studies of our product candidates;the costs and timing of obtaining, enforcing and defending our patent and intellectual rights;the costs and timing of regulatory approvals; andthe note holders choice of having the notes repaid in cash or converting the notes into our common stock.


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In addition to the foregoing, our future capital uses and requirements are also dependent in part on the ability of our licensees and collaborative partners to meet their obligations to us, including the fulfillment of their development and commercialization responsibilities in respect of our product candidates.  Our sublicensee and collaborative partners, Neurocrine and Pfizer, may encounter conflicts of interest, changes in business strategy or other business issues, or they may acquire or develop rights to competing products, all of which could adversely affect their ability or willingness to fulfill their obligations to us and, consequently, require us to satisfy, through the commitment of additional funds or personnel or both, any shortfalls in their performance.





To meet future capital requirements, we may attempt to raise additional funds through equity or debt financings, collaborative agreements with corporate partners or from other sources. If adequate funds are not available, we may be required to curtail or delay significantly one or more of our product development programs. In addition, future milestone payments under some of our collaborative or license agreements are contingent upon our meeting particular research or development goals. The amount and timing of future milestone payments are contingent upon the terms of each collaborative or license agreement. Milestone performance criteria are specific to each agreement and based upon future performance. Therefore, we are subject to significant variation in the timing and amount of our revenues, milestone expenses and results of operations from period to period.





Contractual Obligations and Commercial Commitments





Future minimum payments for all contractual obligations for the nine months remaining in fiscal 2004 and for the years subsequent to 2004, are as follows:





|                                           |  | Years Ended December 31, |     | 
|------------------------------------------ |  | ------------------------ | --- | 
|                                           |  |                          |     | 
|                                           |  | **2004**                 |     | 
|                                           |  |                          |     | 
|                                           |  | (in thousands)          
|Convertible promissory note                |  | $                        |    | 
|Convertible line of credit promissory note |  |                          |    | 
|Operating leases                           |  |                          | 318 | 
|                                           |  |                          |     | 
|Total                                      |  | $                        | 318 | 
|                                           |  |                          |     | 




The table
  above excludes future milestones and royalties which may be owed to Wyeth, Elan and Biovail under terms of existing agreements as payments
  are contingent upon future events. We do not expect to pay any milestones, or royalties under these agreements in 2004. In May 1998,
  we licensed from Wyeth, on an exclusive, worldwide basis, indiplon, bicifadine, ocinaplon and DOV 216,303 for any indication, and these
  compounds have been developed for insomnia, pain, anxiety and depression. We have the right to develop and commercialize these compounds,
  including the right to grant sublicenses to third parties, subject to Wyeths right of first refusal. On February 25, 2004, we
  entered into agreements to reorganize our exclusive license agreement with Wyeth in respect of four compounds, indiplon, ocinaplon,
  bicifadine and DOV 216,303, and our sublicense agreement with Neurocrine in respect of indiplon. Under the restated license agreements,
  if we sell the products ourselves, we are obligated to pay Wyeth royalties of 3.5% of net sales for ocinaplon and DOV 216,303 and 5.0%
  of net sales for bicifadine, and milestones of $2.5 million for ocinaplon and DOV 216,303 and $5.0 million for bicifadine upon
  NDA filing and $4.5 million each for bicifadine, ocinaplon and DOV 216,303 upon a NDA approval. The royalty rate for bicifadine, ocinaplon
  and DOV 216,303 will increase by 0.5% should we partner or sublicense that compound. In addition, should we partner or sublicense a
  compound, the next milestone payable to Wyeth for that compound will be accelerated to become due upon partnering. If we enter into
  a change of control transaction as defined in the agreement before February 25, 2005, we must pay Wyeth an additional $10 million milestone
  upon closing of such change of control transaction. As part of the reorganization, Neurocrine acquired Wyeths interest under the
  license covering indiplon. Accordingly, the reorganization with Neurocrine allows Neurocrine to pay to us royalty and milestone payments
  net of those amounts that would be owed by us to Wyeth under the earlier agreement. Our economics will therefore remain unchanged and
  we will continue to be entitled to receive $3.5 million in aggregate milestones upon Neurocrines NDA filing and approval and 3.5%
  royalty on worldwide sales.





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Recent Accounting Pronouncements





In December 2003, the FASB reissued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 with certain modifications and clarifications. Application of this guidance was effective for interests in certain variable interest entities commonly referred to as special purpose entities and for variable interest entities created or acquired after February 1, 2003 as of December 31, 2003. Application for all other types of variable interest entities created after February 1, 2003 is required for the period ended after March 15, 2004 unless previously applied. We adopted the revised interpretation of FIN 46 and it did not have a material effect on our financial position or results of operations.





ITEM 3.Quantitative and Qualitative Disclosures About Market Risks





To date,
  we have invested our cash balances with significant financial institutions. In the future, the primary objective of our investment activities
  will be to maximize the income we receive from our investments consistent with preservation of principal and minimum risk. Some of the
  securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the principal amount
  of the investment to fluctuate. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and investments
  in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and corporate
  obligations. Because of the short holding period of these types of investments, we have concluded that we do not have a material financial
  market risk exposure.





ITEM 4.Controls and Procedures





As required by Rule 13a-15(e) under the Exchange Act, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out by management as of March 31, 2004, under the supervision and with the participation of our president, chief executive officer and secretary, and our vice president of finance and chief financial officer (our principal executive officer and principal financial officer). Based upon that evaluation, these officers concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us and our subsidiaries required to be included in our
periodic SEC filings.





There was no significant change in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II  OTHER INFORMATION





ITEM 1.Legal Proceedings





We are not a party to any material legal proceedings.





ITEM 2.Changes in Securities and Use of Proceeds





Recent Sales of Unregistered Securities





On March 29, 2004, we concluded a private placement of 666,667 shares of our common stock to Acqua Wellington Opportunity I Limited for $10.0 million. We believe that this offering was exempt from the registration requirements of the Securities Act of 1933, as amended (the Securities Act) by reason of Rule 506 of Regulation D and Section 4(2) of the Securities Act, based upon the fact that the offer and sale of the securities satisfied all the terms and conditions of Rules 501 and 502 of the Securities Act, the purchaser is financially sophisticated and had access to complete information concerning us and acquired the securities for investment and not with a view to the distribution thereof. Pursuant to the securities purchase agreement we filed a registration statement for the registrable securities in April 2004.








Changes in Securities





On March 31, 2004, Elan converted all the 354,643 shares of series B preferred stock into 574,521 shares of our common stock in accordance with the original terms of the transaction documents.





ITEM 5.Other Information





Risk Factors and Factors Affecting Forward-Looking Statements





If any of the events covered by the following risks occur, our business, results of operations and financial condition could be harmed. In that case, the trading price of our common stock could decline. In addition, our actual results may differ materially from our forward-looking statements as a result of the following factors.


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Risks Related to Our Business





Our stock price is likely to be volatile and the market price of our common stock may decline.








Prior to our April 24, 2002 initial public offering of 5,000,000 shares of our common stock, there had been no public market for our common stock and an active public market for our common stock may cease at any time. Market prices for securities of biopharmaceutical companies have been particularly volatile. In particular, our stock price has experienced a substantial decline following our initial public offering. Some of the factors that may cause the market price of our common stock to fluctuate include:


- results of clinical trials conducted by us or on our behalf, or by our competitors;
- business or legal developments concerning our collaborators or licensees, including Pfizer and Neurocrine;
- regulatory developments or enforcement in the United States and foreign countries;
- developments or disputes concerning patents or other proprietary rights;
- changes in estimates or recommendations by securities analysts;
- public concern over our drugs;
- litigation;
- future sales of our common stock;
- general market conditions;
- changes in the structure of health care payment systems;
- failure of any of our product candidates, if approved, to achieve commercial success;
- economic and other external factors or other disasters or crises; and
- period-to-period fluctuations in our financial results.

If any of the foregoing risks occur, our stock price could fall and expose us to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management. In this regard, following a decline in the aftermarket trading price of our common stock in connection with our initial public offering, beginning on April 30, 2002, a number of class action lawsuits were filed naming us as defendants, in addition to certain of our officers and directors and certain of our underwriters. On December 20, 2002, we entered into a settlement agreement, which was approved by the court on April 16, 2003, to settle these lawsuits. Pursuant to the settlement agreement, we have paid the class members (inclusive of their attorneys fees and costs) $250,000 in cash and issued them six-year warrants to purchase 500,000 shares of our common stock with an exer

cise
price of $10.00 per share. Upon issuance, we determined the value of the warrants to be $2.2 million.





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We have incurred losses since our inception and expect to incur significant losses for the foreseeable future, and we may never reach profitability.





Since our inception in April 1995 through March 31, 2004, we have incurred significant operating losses and, as of March 31, 2004, we had an accumulated deficit of $75.1 million. We have not yet completed the development, including obtaining regulatory approvals, of any product candidate and, consequently, have not generated any revenues from the sale of products. Even if we succeed in developing and commercializing one or more of our product candidates, we may never achieve significant sales revenue and we expect to incur operating losses for the foreseeable future. We also expect to continue to incur significant operating expenses and capital expenditures and anticipate that our expenses will increase substantially in the foreseeable future as we:


- conduct clinical trials;
- conduct research and development on existing and new product candidates;
- make milestone and royalty payments;
- seek regulatory approvals for our product candidates;
- commercialize our product candidates, if approved;
- hire additional clinical, scientific and management personnel;
- add operational, financial and management information systems and personnel; and
- identify additional compounds or product candidates and acquire rights from third parties to those compounds or product candidates through a grant of a license to us, referred to as in-licensing.

We must generate significant revenue to achieve and maintain profitability. We may not be able to generate sufficient revenue and we may never be able to achieve or maintain profitability.





We are dependent on the successful outcome of clinical trials for our six lead product candidates.





None of our product candidates is currently approved for sale by the FDA or by any other regulatory agency in the world, and our product candidates may never be approved for sale or become commercially viable. Before obtaining regulatory approval for the sale of our product candidates, they must be subjected to extensive preclinical and clinical testing to demonstrate their safety and efficacy for humans. Our success will depend on the success of our currently ongoing clinical trials and subsequent clinical trials that have not yet begun.





There are a number of difficulties and risks associated with clinical trials. The possibility exists that:


- we may discover that a product candidate may cause harmful side effects;
- we may discover that a product candidate does not exhibit the expected therapeutic results in humans;
- results may not be statistically significant or predictive of results that will be obtained from large-scale, advanced clinical trials;
- we or the FDA may suspend or delay initiation of further clinical trials of our product candidates for any of a number of reasons, including safety;
- we may be delayed in the FDA protocol review process;
- patient recruitment may be slower than expected; and
- patients may drop out of our clinical trials.

In October 2003,
  the FDA placed the start of our Phase III pivotal clinical trial of ocinaplon on hold and requested that we produce additional safety
  information. We have submitted a response to the FDA and have requested the FDA to lift the clinical hold. In April 2004, we received
  notice from the Division of Neuropharmacological Drug Products at the FDA that it is willing to meet with us to discuss the continued
  clinical hold of ocinaplon. The meeting is scheduled for late June 2004. We cannot assure you that we have submitted or will be able
  to submit all information expected by the FDA or further information that may be requested by the FDA, or that our response will be
  seen as persuasive, or that the FDA will release the hold placed by it on the commencement of a Phase III pivotal clinical trial of
  ocinaplon or any revised clinical trial designed to respond to the FDAs safety concerns. Given the uncertainty surrounding the
  regulatory and clinical trial process, we may not be able to successfully advance the development of safe, commercially viable products
  including ocinaplon.


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If we are unable to successfully develop and commercialize any of our product candidates, this could severely harm our business, impair our ability to generate revenues and adversely impact our stock price.





We may not receive regulatory approvals for our product candidates or approvals may be delayed.





Regulation by government authorities in the United States and foreign countries is a significant factor in the development, manufacture and commercialization of our product candidates and in our ongoing research and development activities. All our product candidates are in various stages of research and development and we have not yet requested or received regulatory approval to commercialize any product candidate from the FDA or any other regulatory body.





In particular, human therapeutic products are subject to rigorous preclinical testing, clinical trials and other approval procedures of the FDA and similar regulatory authorities in foreign countries. The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record keeping, labeling, storage, approval, advertising, promotion, sale and distribution of biopharmaceutical products. Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each therapeutic indication to establish the product candidates safety and efficacy. The approval process may take many years to complete and may involve ongoing requirements for post-marketing studies. Additionally, even after receipt of FDA approval, the FDA may request additional trials to evaluate any adverse reactions or long-term
effects. The scope and expense of such post-approval trials could be extensive and costly to us. Any FDA or other regulatory approval of our product candidates, once obtained, may be withdrawn. If our product candidates are marketed abroad, they will also be subject to extensive regulation by foreign governments.





Any failure to receive regulatory approvals necessary to commercialize our product candidates would have a material adverse effect on our business. The process of obtaining these approvals and the subsequent compliance with appropriate federal and state statutes and regulations require spending substantial time and financial resources. If we, or our collaborators or licensees, fail to obtain or maintain or encounter delays in obtaining or maintaining regulatory approvals, it could adversely affect the marketing of any product candidates we develop, our ability to receive product or royalty revenues and our liquidity and capital resources.





As noted
  above, in October 2003, the FDA placed the start of our Phase III pivotal clinical trial of ocinaplon on hold and requested that
  we produce additional safety information. In April 2004, we received notice from the Division of Neuropharmacological Drug Products
  at the FDA that it is willing to meet with us to discuss the continued clinical hold of ocinaplon. The meeting is scheduled for late
  June 2004. We cannot assure you that we have submitted or will be able to submit all information expected by the FDA or further information
  that may be requested by the FDA or that our response will be seen as persuasive, or that the FDA will release the hold placed by it
  on the commencement of the Phase III pivotal clinical trial or any revised clinical trial designed to respond to the FDAs safety
  concerns.





Our operating results are subject to fluctuations that may cause our stock price to decline.





Our revenue is unpredictable and has fluctuated significantly from year-to-year and quarter-to-quarter and will likely continue to be highly volatile. We believe that period-to-period comparisons of our past operating results are not good indicators of our future performance and should not be relied on to predict our future results. In the future, our operating results in a particular period may not meet the expectations of any securities analysts whose attention we may attract, or those of our investors, which may result in a decline in the market price of our common stock.





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We rely entirely on the efforts of Neurocrine and Pfizer for the development, design and implementation of clinical trials, regulatory approval and commercialization of our insomnia compound, indiplon.





In 1998, we sublicensed indiplon to Neurocrine without retaining any material rights other than the right to receive milestone payments and royalties on product sales, if any. In December 2002, Neurocrine entered into a development and commercialization agreement with Pfizer Inc. for indiplon. The clinical development, design and implementation of clinical trials, the preparation of filings for FDA approval and, if approved, the subsequent commercialization of indiplon, and all other matters relating to indiplon, are entirely within the control of Neurocrine and Pfizer. We will have no control over the process and, as a result, our ability to receive any revenue from indiplon is entirely dependent on the success of their efforts. Neurocrine and Pfizer may fail or otherwise decide not to devote the resources necessary to successfully develop and commercialize indiplon, which would
impair our ability to receive milestone or royalty payments, if any, in respect of indiplon.





Our success in developing our product candidates depends upon the performance of our licensees and collaborative partners.





Our efforts to develop, obtain regulatory approval for and commercialize our existing and any future product candidates depend in part upon the performance of our licensees and collaborative partners. Currently, we have license and collaborative agreements with Neurocrine, Pfizer and Wyeth. Neurocrine has entered into a development and commercialization agreement with Pfizer involving a further sublicense under our agreement with Neurocrine. In connection with certain of these agreements, we have granted certain rights, including development and marketing rights and rights to defend and enforce our intellectual property. We do not have day-to-day control over the activities of our licensees or collaborative partners and cannot assure you that they will fulfill their obligations to us, including their development and commercialization responsibilities in respect of our product
candidates. We also cannot assure you that our licensees or collaborators will properly maintain or defend our intellectual property rights or that they will not utilize our proprietary information in such a way as to invite litigation that could jeopardize or potentially invalidate our proprietary information or expose us to potential liability. Further, we cannot assure you that our licensees or collaborators will not encounter conflicts of interest, changes in business strategy or other business issues, or that they will not acquire or develop rights to competing products, all of which could adversely affect their willingness or ability to fulfill their obligations to us.





From January 1999 until October 21, 2003, Elan and we were engaged in developing controlled release formulations of bicifadine and ocinaplon pursuant to our joint venture. Effective January 1, 2003, Elan no longer funded its pro rata portion of the joint ventures expenses and, in October 2003, we acquired from Elan 100% ownership of Nascime, the joint ventures operating subsidiary, and the product candidates bicifadine and ocinaplon. This acquisition ended our involvement with Elan in the nearly five-year joint venture. If we decide to retain Elan to provide additional development and manufacturing services, we and Elan will negotiate appropriate terms under a new agreement. In March 2003, we and Biovail terminated our collaboration for DOV diltiazem.





Any failure on the part of our licensees or collaborators to perform or satisfy their obligations to us could lead to delays in the development or commercialization of our product candidates and affect our ability to realize product revenues. Disagreements with our licensees or collaborators could require or result in litigation or arbitration, which could be time-consuming and expensive. If we fail to maintain our existing agreements or establish new agreements as necessary, we could be required to undertake development, manufacturing and commercialization activities solely at our own expense. This would significantly increase our capital requirements and may also delay the commercialization of our product candidates.





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Our existing collaborative and licensing agreements contain, and any such agreements that we may enter into in the future may contain, covenants that restrict our product development and commercialization activities.





Our existing license and collaborative agreements contain covenants that restrict our product development or future business efforts and have involved, among other things, the issuance of debt and equity securities, limitations on our ability to license our product candidates to third parties and restrictions on our ability to compete. Because of these restrictive covenants, if our licensees or collaborators fail to fulfill their obligations to us or we are otherwise not able to maintain these relationships, we cannot assure you that we will be able to enter into alternative arrangements or assume the development of these product candidates ourselves. This would significantly affect our ability to commercialize our product candidates. Further, we cannot assure you, even if alternative arrangements are available to us, that they will be any less restrictive on our business activities.








If we are unable to create sales, marketing and distribution capabilities, or enter into agreements with third parties to perform these functions, we will not be able to commercialize our product candidates.





We do not have any sales, marketing or distribution capabilities. In order to commercialize our product candidates, if any are approved, we must either acquire or internally develop sales, marketing and distribution capabilities or make arrangements with third parties to perform these services for us. If we obtain FDA approval for our existing product candidates, we intend to rely on relationships with one or more pharmaceutical companies or other third parties with established distribution systems and direct sales forces to market our product candidates. If we decide to market any of our product candidates directly, we must either acquire or internally develop a marketing and sales force with technical expertise and with supporting distribution capabilities. The acquisition or development of a sales and distribution infrastructure would require substantial resources, which may
divert the attention of our management and key personnel, and negatively impact our product development efforts. Moreover, we may not be able to establish in-house sales and distribution capabilities or relationships with third parties. To the extent we enter into co-promotion or other licensing agreements, our product revenues are likely to be lower than if we directly marketed and sold our product candidates, and any revenue we receive will depend upon the efforts of third parties, which may not be successful.





If we cannot raise additional funding, we may be unable to complete development of our product candidates.





At March 31, 2004, we had cash and cash equivalents and marketable securities of $57.9 million. We currently have no commitments or arrangements for any financing. We believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our anticipated operating expenses, debt obligations and capital requirements until at least the end of 2004. Our convertible promissory note and our convertible line of credit promissory note mature on January 20, 2005, at which time the principal amount and unpaid accrued interest become due and payable. At anytime prior to the date either of the notes are paid in full, the holders of the notes have the right to convert the outstanding principal and unpaid accrued interest amount of the convertible promissory note and the convertible line of credit promissory note into shares of our common stock at $3.98 per share


 and $3.41 per share, respectively. If in January 2005 the note holders choose to have the notes repaid in cash, we will be required to pay them approximately $16.1 million and if we have not raised additional capital, curtail operations until we raise additional capital. Even if the note holders choose to exchange the notes into shares of our common stock, we believe that we may require additional funding after 2004 to continue our research and development programs, including preclinical testing and clinical trials of our product candidates, for operating expenses and to pursue regulatory approvals for our product candidates. We may continue to seek additional capital through public or private financing or collaborative agreements. If adequate funds are not available, we may be required to curtail significantly or eliminate at least temporarily one or more of our product development programs.





The success of our business depends upon the members of our senior management team, our scientific staff and our ability to continue to attract and retain qualified scientific, technical and business personnel.





We are dependent on the members of our senior management team, in particular, our Chief Executive Officer and President, Dr. Arnold Lippa, our Senior Vice President and Chief Scientific Officer, Dr. Phil Skolnick, and our Senior Vice President, Drug Development, Dr. Warren Stern, for our business success. Moreover, because of the specialized scientific and technical nature of our business, we are also highly dependent upon our scientific staff, the members of our scientific advisory board and our continued ability to attract and retain qualified scientific, technical and business development personnel. Dr. Lippa holds a substantial amount of vested common stock not subject to repurchase in the event of termination. We do not carry key man life insurance on the lives of any of our key personnel. There is intense competition for human resources, including management in the scientific
fields in which we operate and there can be no assurance that we will be able to attract and retain qualified personnel necessary for the successful development of our product candidates, and any expansion into areas and activities requiring additional expertise. In addition, there can be no assurance that such personnel or resources will be available when needed. The loss of the services of Drs. Lippa, Skolnick or Stern, or other key personnel, could severely harm our business if a replacement possessing a similar level of expertise cannot be retained or if the key persons responsibilities cannot be assumed by existing employees.


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Because some of our patents with respect to some of our product candidates have expired or will expire in the near term, we may be required to rely solely on the Hatch-Waxman Act for market exclusivity.





A number of patents that we licensed from Wyeth have expired, including certain patents that provide protection for the use of DOV 216,303 for the treatment of depression, the use of bicifadine for the treatment of pain and the use of ocinaplon for anxiety. Patents protecting intermediates useful in the manufacture of ocinaplon are due to expire in 2007. The numerous patent applications pending and others in preparation covering our compounds, even if approved, may not afford us adequate protection against generic versions of our product candidates or other competitive products. In the event we achieve regulatory approval to market any of our product candidates, including bicifadine, DOV 216,303 or ocinaplon, and we are unable to obtain adequate patent protection for the ultimate marketed product, we will be required to rely to a greater extent on the Hatch-Waxman Act, and applicable


foreign legislation, to achieve market exclusivity. The Hatch-Waxman Act generally provides for marketing exclusivity to the first applicant to gain approval for a particular drug by prohibiting filing of an abbreviated NDA, or ANDA, by a generic competitor for up to five years after the drug is first approved. The Hatch-Waxman Act, however, also accelerates the approval process for generic competitors using the same active ingredients once the period of statutory exclusivity has expired. It may also in practice encourage more aggressive legal challenges to the patents protecting approved drugs. In addition, because some of our patents have expired, third parties may develop competing product candidates using our product compounds and if they obtain regulatory approval for those products prior to us, we would be barred from seeking an ANDA for those products under the Hatch-Waxman Act for the applicable statutory exclusivity period.





Our business activities require compliance with environmental laws, which if violated could result in significant fines and work stoppage.





Our research and development programs, and the manufacturing operations and disposal procedures of our contractors and collaborators, are affected by federal, state, local and foreign environmental laws. Although we intend to use reasonable efforts to comply with applicable environmental laws, our contractors and collaborators may not comply with these laws. Failure to comply with environmental laws could result in significant fines and work stoppage, and may harm our business.





We intend to pursue a rapid growth strategy, which could give rise to difficulties in managing and successfully implementing such growth.





We intend to pursue a strategy of growth, both with regard to infrastructure and personnel, and will seek to aggressively develop our current product candidates and to acquire new product candidates. In the event of rapid growth in our operations, we will need to hire additional personnel, some of whom, due to the specialized scientific and technical nature of our business, must possess advanced degrees, be highly skilled and have many years of experience. We may be unable to attract and retain the necessary qualified personnel, or such personnel may not be available when needed, to successfully meet our growth needs. We cannot assure you that we will be able to obtain the personnel needed to achieve such growth or that we will be able to obtain and maintain all regulatory approvals or employ the best personnel to ensure compliance with all applicable laws, regulations and licensing
requirements that may be necessary as a result of such growth.





Our bylaws require us to indemnify our officers and directors to the fullest extent permitted by law, which may obligate us to make substantial payments and in some instances payments in advance of judicial resolution of entitlement.





Our bylaws require that we indemnify our directors, officers and scientific advisory board members, and permit us to indemnify our other employees and agents, to the fullest extent permitted by the Delaware corporate law. This could require us, with some legally prescribed exceptions, to indemnify our directors, officers and scientific advisory board members against any and all expenses, judgments, penalties, fines and amounts reasonably paid in defense or settlement in connection with an action, suit or proceeding relating to their association with us. For directors, our bylaws require us to pay in advance of final disposition all expenses including attorneys fees incurred by them in connection with any action, suit or proceeding relating to their status or actions as directors. Advance payment of legal expenses is discretionary for officers, scientific advisory board members a

nd
other employees or agents. We may make these advance payments provided that they are preceded or accompanied by an undertaking on behalf of the indemnified party to repay all advances if it is ultimately determined that he or she is not entitled to be indemnified by us. Accordingly, we may incur expenses to meet these indemnification obligations, including expenses that in hindsight are not qualified for reimbursement and possibly not subject to recovery as a practical matter.


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Provisions of Delaware law, our charter and by-laws and our stockholders rights plan may make a takeover more difficult.





Provisions of our certificate of incorporation and by-laws and in the Delaware corporate law may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by our management and board of directors. Moreover, our stockholders rights plan, adopted in October 2002, commonly called a poison pill, empowers our board of directors to delay or negotiate, and thereby possibly to thwart, any tender or takeover attempt the board of directors opposes. Public stockholders who might desire to participate in such a transaction may not have an opportunity to do so. We also have a staggered board of directors that makes it difficult for stockholders to change the composition of our board of directors in any one year. These anti-takeover provisions could substantially impede the ability of public stockholders to change our
management and board of directors.





Risks Related to our Industry





We face intense competition and if we are unable to compete effectively, the demand for our products, if any, may be reduced.





The pharmaceutical industry is highly competitive and marked by a number of established, large pharmaceutical companies, as well as smaller emerging companies, whose activities are directly focused on our target markets and areas of expertise. We face and will continue to face competition in the discovery, in-licensing, development and commercialization of our product candidates, which could severely impact our ability to generate revenue or achieve significant market acceptance of our product candidates. Furthermore, new developments, including the development of other drug technologies and methods of preventing the incidence of disease, occur in the pharmaceutical industry at a rapid pace. These developments may render our product candidates or technologies obsolete or noncompetitive.





We are focused on developing product candidates for the treatment of central nervous system, cardiovascular and other disorders that involve alterations in neuronal processing. We have a number of competitors. If one or more of their products or programs are successful, the market for our product candidates may be reduced or eliminated. Compared to us, many of our competitors and potential competitors have substantially greater:





- capital resources;
- research and development resources, including personnel and technology;
- regulatory experience;
- preclinical study and clinical testing experience; and
- manufacturing, distribution and marketing experience.

As a result of these factors, our competitors may obtain regulatory approval of their products more rapidly than we. Our competitors may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates or technologies. Our competitors may also develop drugs that are more effective, useful and less costly than ours and may also be more successful than we and our collaborators or licensees in manufacturing and marketing their products.





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If we are unable to protect our intellectual property, our competitors could develop and market products based on our discoveries, which may reduce demand for our product candidates.





To a substantial degree, our success will depend on the following intellectual property achievements:





- our ability to obtain patent protection for our proprietary technologies and product candidates, as well as our ability to preserve our trade secrets;
- the ability of our collaborators and licensees to obtain patent protection for their proprietary technologies and product candidates covered by our agreements, as well as their ability to preserve related trade secrets; and
- our ability to prevent third parties from infringing upon our proprietary rights, as well as the ability of our collaborators and licensees to accomplish the same.

Because of the substantial length of time and expense associated with bringing new products through the development and regulatory approval processes in order to reach the marketplace, the pharmaceutical industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Accordingly, we, either alone or together with our collaborators or licensees, intend to seek and enhance patent protection for our proprietary technologies and product candidates. The risk exists, however, that these patents may be unobtainable and that the breadth of the claims in a patent, if obtained, may not provide adequate protection of our, or our collaborators or licensees, proprietary technologies or product candidates.





We also rely upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our collaborators, licensees, employees and consultants. We also have confidentiality and invention or patent assignment agreements with our employees and some of, but not all, our collaborators and consultants. If our employees, collaborators or consultants breach these agreements or common law principles, we may not have adequate remedies for any such breach, and our trade secrets may otherwise become known to or independently discovered by our competitors.





In addition, although we own or otherwise have certain rights to a number of patents and patent applications, the issuance of a patent is not conclusive as to its validity or enforceability, and third parties may challenge the validity or enforceability of our patents or the patents of our collaborators or licensees. We cannot assure you how much protection, if any, will be given to our patents if we attempt to enforce them or if they are challenged in court or in other proceedings. It is possible that a competitor may successfully challenge our patents, or the patents of our collaborators or licensees, or that challenges will result in elimination of patent claims and therefore limitations of coverage. Moreover, competitors may infringe our patents, the patents of our collaborators or licensees, or successfully avoid them through design innovation. To prevent infringement or
unauthorized use, we may need to file infringement claims, which are expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the ground that our patents do not cover its technology. In addition, interference proceedings brought by the USPTO may be necessary to determine the priority of inventions with respect to our patent applications or those of our collaborators or licensees. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and be a distraction to management. We cannot assure you that we, or our collaborators or licensees, will be able to prevent misappropriation of our respective proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States.





The intellectual property of our competitors or other third parties may prevent us from developing or commercializing our product candidates.





Our product candidates and the technologies we use in our research may inadvertently infringe the patents or violate the proprietary rights of third parties. In addition, other parties conduct their research and development efforts in segments where we, or our collaborators or licensees, focus research and development activities. We cannot assure you that third parties will not assert patent or other intellectual property infringement claims against us, or our collaborators or licensees, with respect to technologies used in potential product candidates. Any claims that might be brought against us relating to infringement of patents may cause us to incur significant expenses and, if 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 could divert the attention of our management and


key personnel from our business operations. In addition, any patent claims brought against our collaborators or licensees could affect their ability to carry out their obligations to us. Furthermore, as a result of a patent infringement suit brought against us, or our collaborators or licensees, the development, manufacture or potential sale of product candidates claimed to infringe a third partys intellectual property may have to stop or be delayed, unless that party is willing to grant certain 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 product candidates. We may not, however, be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all. Even if we, or our collaborators or licensees, were able to obtain rights to a third partys intellectual property, these rights may be non-exclusive, thereby
giving our competitors potential access to the same intellectual property. Ultimately, we may be unable to commercialize some of our potential products or may have to cease some of our business operations as a result of patent infringement claims, which could severely harm our business.


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Our ability to receive royalties and profits from product sales depends in part upon the availability of reimbursement for the use of our products from third-party payors, for which we may or may not qualify.





Our royalties or profits will be heavily dependent upon the availability of reimbursement for the use of our products from third-party health care payors, both in the United States and in foreign markets. The health care industry and these third-party payors are experiencing a trend toward containing or reducing the costs of health care through various means, including lowering reimbursement rates and negotiating reduced payment schedules with service providers for drug products. These cost-containment efforts could adversely affect the market acceptance of our product candidates and may also harm our business. There can be no assurance that we will be able to offset any of the payment reductions that may occur.





Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payors determination that use of a product is:





- safe, effective and medically necessary;
- appropriate for the specific patient;
- cost-effective; and
- neither experimental nor investigational.

Reimbursement approval is required from each third-party payor individually, and seeking this approval is a time-consuming and costly process. Third-party payors may require cost-benefit analysis data from us in order to demonstrate the cost-effectiveness of any product we might bring to market. We cannot assure you that we will be able to provide data sufficient to gain acceptance with respect to reimbursement. There also exists substantial uncertainty concerning third-party reimbursement for the use of any drug product incorporating new technology. We cannot assure you that third-party reimbursement will be available for our product candidates utilizing new technology, or that any reimbursement authorization, if obtained, will be adequate.





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We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for a product and may have to limit its commercialization.





The use of our product candidates in clinical trials and the sale of any approved products may expose us to a substantial risk of product liability claims and the adverse publicity resulting from such claims. These claims might be brought against us by study participants or once a drug has received regulatory approval and is marketed, consumers, health care providers, pharmaceutical companies or others selling our products. If we cannot successfully defend ourselves against these claims, we may incur substantial losses or expenses, or be required to limit the commercialization of our product candidates.  We have obtained limited product liability insurance coverage for our clinical trials in the amount of $3.0 million per occurrence and $3.0 million in the aggregate. Our insurance coverage, however, may not reimburse us or may not be
sufficient to reimburse us for any 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. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us would decrease our cash and could cause our stock price to fall.





ITEM 6.Exhibits and Reports on Form 8-K





(a) Exhibits.





The following is a complete list of exhibits filed or incorporated by reference as part of this report.





Exhibit No.





31.1        Certification of Chief Executive Officer of DOV Pharmaceutical, Inc., pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.





31.2        Certification of Chief Financial Officer of DOV Pharmaceutical, Inc. pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.





32.1        Certification of Chief Executive Officer of DOV Pharmaceutical, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





32.2        Certification of Chief Financial Officer of DOV Pharmaceutical, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





(b)Reports on Form 8-K.





We filed current reports on Form 8-K on January 16, 2004 (Items 5 and 7), February 23, 2004 (Items 5 and 7), March 15, 2004 (Items 5 and 7) and March 30, 2004 (Items 5 and 7).





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SIGNATURES





Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





|                             | DOV
          Pharmaceutical, Inc.                                                                   
|---------------------------- | -----------------------------------------------------------------------------------------------------
|Date:
          May 10, 2004 | By:/s/ Arnold S. Lippa                                                                               
|                             | Name:Arnold
          S. LippaTitle:Chief Executive Officer, President and Secretary                 
|                             |                                                                                                      
|                             |                                                                                                      
|                             | DOV
          Pharmaceutical, Inc.                                                                   
|Date:
          May 10, 2004 | By:/s/ Barbara G. Duncan                                                                             
|                             | Name:Barbara
          G. DuncanTitle:Vice President of Finance and Chief Financial
          Officer







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