**UNITED
STATES**


**SECURITIES
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, 2005





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**
    
    **22-3374365**(State or Other
      Jurisdiction
    
    (I.R.S.
      Employerof
      Incorporation or Organization)
    
    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, 2005,  there
were outstanding 22,759,876 shares
of the registrant’s common stock, par value $0.0001 per share.





- 1
-














**DOV
PHARMACEUTICAL, INC.**





**Form
10-Q**





**For
the Quarter Ended March 31, 2005**





**Table
of Contents**





**PAGE
      NUMBER****PART
      I -**
    **FINANCIAL
      INFORMATION**ITEM
      1.
    Financial
      StatementsConsolidated
      Balance Sheets as of March 31, 2005 and December 31, 2004
    4Consolidated
      Statements of Operations for the three months ended March 31, 2005 and
      2004
    5Consolidated
      Statements of Cash Flows for the three months ended March 31, 2005 and
      2004
    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
    16ITEM
      4.
    Controls
      and Procedures
    16**PART
      II -**
    **OTHER
      INFORMATION**ITEM
      1.
    Legal
      Proceedings
    17ITEM
      2.
    Unregistered
      Sales of Equity Securities and Use of Proceeds
    17ITEM
      5.
    Other
      Information
    17ITEM
      6.
    Exhibits
    27Signatures
    28











- 2
-





**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 of 1934, 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
      or require partners to 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. 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,
      2004**
    
    **March
      31, 2005**(Unaudited)**Assets**Current
      assets:Cash
      and cash equivalents
    
    $
    28,934,473
    
    $
    11,994,407Marketable
      securities—short-term
    
    
    80,051,777
    
    
    99,506,979Prepaid
      expenses and other current assets
    
    
    1,771,681
    
    
    1,812,347Total
      current assets
    
    
    110,757,931
    
    
    113,313,733Marketable
      securities—long-term
    
    
    23,235,823
    
    
    25,449,486Property
      and equipment, net
    
    
    476,419
    
    
    538,488Deferred
      charges, net
    
    
    2,252,380
    
    
    2,624,222Total
      assets
    
    $
    136,722,553
    
    $
    141,925,929**Liabilities
      and Stockholders’ Equity**Current
      liabilities:Accounts
      payable
    
    $
    3,273,357
    
    $
    3,485,194Accrued
      expenses
    
    
    3,911,550
    
    
    5,147,393Convertible line of credit promissory note
    
    
    4,003,275
    
    
    —Deferred
      revenue—current
    
    
    8,235,294
    
    
    8,235,294Total
      current liabilities
    
    
    19,423,476
    
    
    16,867,881Deferred
      revenue—non-current
    
    
    24,362,745
    
    
    22,303,922Convertible
      subordinated debentures
    
    
    65,000,000
    
    
    80,000,000Commitments
      and contingenciesStockholders'
      equity:Preferred
      stock—undesignated
      preferred stock,$1.00
      par value, 6,550,357 shares authorized, 0 shares issued and outstanding at
      December 31, 2004 and March 31, 2005
    
    
    —
    
    
    —Common
      stock, $.0001 par value, 60,000,000 shares authorized, 21,462,628 issued
      and outstanding at December 31, 2004 and 22,754,876 issued and outstanding
      at March 31, 2005
    
    
    2,146
    
    
    2,276Additional
      paid-in capital
    
    
    128,500,216
    
    
    132,641,352Accumulated
      other comprehensive loss
    
    
    (247,553
    )
    
    (464,093
    )Accumulated
      deficit
    
    
    (100,317,086
    )
    
    (109,424,700
    )Unearned
      compensation
    
    
    (1,391
    )
    
    (709
    )Total
      stockholders' equity
    
    
    27,936,332
    
    
    22,754,126Total
      liabilities and stockholders' equity
    
    $
    136,722,553
    
    $
    141,925,929








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





- 4
-





**DOV
PHARMACEUTICAL, INC.**


**CONSOLIDATED
STATEMENTS OF OPERATIONS**





**Three
      Months Ended****March
      31,****2004**
    
    **2005**(Unaudited)Revenue
    
    $
    —
    
    $
    2,058,823Operating
      expenses:Research
      and development expense
    
    
    5,509,292
    
    
    9,806,602General
      and administrative expense
    
    
    1,257,382
    
    
    1,632,110Loss
      from operations
    
    
    (6,766,674
    )
    
    (9,379,889
    )Interest
      income
    
    
    157,893
    
    
    878,814Interest
      expense
    
    
    (1,081,366
    )
    
    (600,608
    )Other
      income (expense), net
    
    
    455
    
    
    (5,931
    )Net
      loss
    
    $
    (7,689,692
    )
    $
    (9,107,614
    )Basic and diluted net loss per share
    
    $
    (0.46
    )
    $
    (0.41
    )Weighted average shares used in computing basic and diluted net loss per
      share
    
    
    16,700,740
    
    
    22,420,128





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





- 5
-


****


**DOV
PHARMACEUTICAL, INC.**


**CONSOLIDATED
STATEMENTS OF CASH FLOWS**








**Three Months Ended March
      31,****2004**
    
    **2005**(Unaudited)**Cash
      flows from operating activities**Net
      loss
    
    $
    (7,689,692
    )
    $
    (9,107,614
    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Non-cash
      amortization of premium paid on marketable securities and depreciation in
      investments
    
    
    274,627
    
    
    287,079Non-cash
      interest expense
    
    
    1,081,366
    
    
    105,148Depreciation
    
    
    50,442
    
    
    69,615Amortization
      of deferred charges
    
    
    29,310
    
    
    36,186Non-cash
      compensation charges
    
    
    17,443
    
    
    682Warrants,
      options and common stock issued for services
    
    
    109,245
    
    
    (294,063
    )Changes in operating assets and liabilities:Prepaid
      expenses and other current assets
    
    
    426,700
    
    
    (20,409
    )Accounts
      payable
    
    
    417,034
    
    
    211,837Accrued
      expenses
    
    
    1,028,502
    
    
    1,235,843Deferred
      revenue
    
    
    —
    
    
    (2,058,823
    )Net
      cash used in operating activities
    
    
    (4,255,023
    )
    
    (9,534,519
    )**Cash
      flows from investing activities**Purchases
      of marketable securities
    
    
    (12,662,846
    )
    
    (72,120,280
    )Sales
      of marketable securities
    
    
    15,150,000
    
    
    49,947,796Purchases
      of property and equipment
    
    
    (90,455
    )
    
    (131,684
    )Net
      cash provided by (used in) investing activities
    
    
    2,396,699
    
    
    (22,304,168
    )**Cash
      flows from financing activities**Borrowings
      under convertible debenture, net of issuance costs
    
    
    —
    
    
    14,571,715Proceeds
      from issuance of stock, net of costs
    
    
    9,965,005
    
    
    —Proceeds
      from options exercised
    
    
    324,218
    
    
    326,906Net
      cash provided by financing activities
    
    
    10,289,223
    
    
    14,898,621Net
      increase (decrease) in cash and cash equivalents
    
    
    8,430,899
    
    
    (16,940,066
    )Cash
      and cash equivalents, beginning of period
    
    
    9,290,999
    
    
    28,934,473Cash
      and cash equivalents, end of period
    
    $
    17,721,898
    
    $
    11,994,407





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





- 6
-





**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 disorders. The Company has six product candidates in clinical trials, and
one product candidate for which a new drug application, or NDA, was filed on
April 14, 2005, 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 outside the United States.





**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, 2004, 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. Significant estimates have included
the development period for the Company’s products. Actual results could differ
from those estimates and the differences could be material.





**Deferred
Charges**





Deferred
charges are issuance costs for the convertible debentures, the convertible
promissory note and the convertible line of credit promissory note and were and
are being amortized over the term of the instruments.





- 7
-





**Net
Loss Per Share**





Basic and
diluted net loss per share has been computed using the weighted-average number
of shares of common stock outstanding during the period. For certain periods,
the Company has excluded the shares issuable on conversion of the convertible
subordinated debentures, convertible promissory note, the convertible line of
credit promissory note, outstanding options and warrants to purchase common
stock from the calculation of diluted net loss per share, as such securities are
antidilutive as indicated in the table below.





**Three
      Months Ended March 31,****2004**
    
    **2005**(Unaudited)Net
      loss
    
    $
    (7,689,692
    )
    $
    (9,107,614
    )Basic and diluted:Weighted
      -average shares used in computing basic and diluted net loss per
      share
    
    
    16,700,740
    
    
    22,420,128Basic
      and diluted net loss per share
    
    $
    (0.46
    )
    $
    (0.41
    )Antidilutive
      securities not included in basic and diluted net loss per share
      calculation:Convertible subordinated debentures
    
    
    —
    
    
    3,516,484Convertible
      promissory note
    
    
    2,877,266
    
    
    —Convertible
      line of credit promissory note
    
    
    1,091,577
    
    
    —Options
    
    
    2,672,890
    
    
    2,934,466Warrants
    
    
    1,311,457
    
    
    852,7697,953,190
    
    
    7,303,719





**Comprehensive
Loss**





**Three
      Months Ended March 31,****2004**
    
    **2005**(Unaudited)Net
      loss
    
    $
    (7,689,692
    )
    $
    (9,107,614
    )Net
      unrealized gains (losses) on marketable securities and
      investments
    
    
    38,652
    
    
    (464,093
    )Comprehensive
      loss
    
    $
    (7,651,040
    )
    $
    (9,571,707
    )







- 8
-





**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 (SFAS) 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,****2004**
    
    **2005**(Unaudited)Net loss as reported
    
    $
    (7,689,692
    )
    $
    (9,107,614
    )Add:
      total stock-based employee compensation expense determined under APB No.
      25
    
    
    17,443
    
    
    682Deduct:
      total stock-based employee compensation expense determined under fair
      value based method for all awards
    
    
    (967,619
    )
    
    (1,056,070
    )Pro
      forma
    
    $
    (8,639,868
    )
    $
    (10,163,002
    )Basic
      and diluted net loss per share:As
      reported
    
    $
    (0.46
    )
    $
    (0.41
    )Pro
      forma
    
    $
    (0.52
    )
    $
    (0.45
    )






**Options
      Outstanding as of**
      **March
      31, 2005**
    
    
    **Options
      Exercisable as of**
      **March
      31, 2005******
    
    
    **Weighted
      Average Remaining Contractual Life**
    
    
    **Number
      Outstanding**
    
    
    **Weighted
      Average**
      **Exercise
      Price**
    
    
    **Number
      Exercisable**
    
    
    **Weighted
      Average**
      **Exercise
      Price**Price
      range $2.27-$9.59
    
    
    5.78
      years
    
    
    1,561,291
    
    $
    3.64
    
    
    1,411,592
    
    $
    3.44Price
      range $9.60-$16.92
    
    
    9.1
      years
    
    
    1,373,175
    
    $
    14.81
    
    
    75,713
    
    $
    14.122,934,466
    
    
    
    
    
    1,487,305





**Concentration
of Credit Risk**





Cash and
cash equivalents are invested in deposits with 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 $2.3 million
of the Company's cash balance was uninsured at March 31, 2005.





**Recent
Accounting Pronouncements**





The
Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (Revised 2004)
(“SFAS No. 123R”), “Share-Based Payment,” in December 2004.  SFAS No. 123R
is a revision of FASB Statement 123, “Accounting for Stock-Based Compensation”
and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,”
and its related implementation guidance. The Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123R requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award. This
statement is effective as of the beginning of the first annual reporting period
that begins after June 15, 2005 and the Company will adopt the standard in the
first quarter of 2006.





- 9
-





As
permitted by SFAS 123, the Company currently accounts for share-based payments
to employees using APB Opinion 25’s intrinsic value method and, as such, it
generally recognizes no compensation cost for employee stock options. Management
cannot predict the impact of the adoption of SFAS 123R at this time because it
will depend on levels of share-based payments granted in the future. The
adoption of SFAS 123R’s fair value method will have a significant impact on the
Company’s results of operations, although it will have no impact on the overall
financial position. Management has not yet completed the analysis of the
ultimate impact that this statement will have on the Company’s operating results
or financial position, nor the method of adoption for this new
standard.





**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 U.S. Food
and Drug Administration, or FDA, regulations.





**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,****2004**
    
    **2005**(Unaudited)Payroll
      related and associated overhead
    
    $
    1,856,920
    
    $
    2,245,474Clinical
      and preclinical development costs and manufacturing
    supplies
    
    
    3,462,099
    
    
    7,497,430Professional fees
    
    
    190,273
    
    
    63,698Total
      research and development expense
    
    $
    5,509,292
    
    $
    9,806,602





**4.
Marketable Securities and Investments**





The
Company considers all highly liquid investments with a maturity of 90 days
or less when purchased to be cash equivalents. The
Company has evaluated its investment policies consistently with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and has
determined that all its investment securities are to be classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported in Stockholders ́ Equity under the
caption "Accumulated Other Comprehensive Income (Loss)." The amortized cost of
debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in other
income and expense. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income. At December 31, 2004 and
March 31, 2005, short-term marketable securities included $61.6 million and
$45.1 million of investments, respectively, primarily comprised of investment
grade asset-backed, variable-rate debt obligations (auction rate securities),
commercial paper and money market funds.





Auction
rate securities are classified as short-term marketable securities and the
related purchases and sales have been classified as investing in the Company’s
Consolidated Statements of Cash Flows. Auction rate securities were classified
as cash and cash equivalents at March 31, 2004. The classification of these
amounts in the Company’s Consolidated Statements of Cash Flows has been revised
to conform to the current year classification. For the three months ended March
31, 2004, net cash provided by investing activities related to these short-term
marketable securities of $2.5 million was included in cash and cash equivalents
in the Company’s Consolidated Statements of Cash Flows. This change in
classification does not affect previously reported results of operations or cash
flows from operations or financing activities in the Consolidated Statements of
Cash Flows.





- 10
-





**5.
Convertible Subordinated Debentures**





In
December 2004 and January 2005, the Company completed a private placement of
$80.0 million aggregate principal amount of 2.5% convertible subordinated
debentures due January 15, 2025. The holders of the debentures may require us to
purchase all or a portion of their debentures on January 15, 2012, January 15,
2015 and January 15, 2020, in each case at a price equal to the principal amount
of the debentures to be purchased, plus accrued and unpaid interest, if any, to
the purchase date. The debentures are unsecured and subordinated in right of
payment to all existing and future senior debt, as defined in the indenture
governing the debentures. The Company will pay interest semi-annually of
$1,000,000 on January 15 and July 15 of each year, commencing July 15, 2005.





The
Company has reserved 3,516,484 shares of common stock for issuance upon
conversion of the debentures. The Company incurred issuance costs related to
this private placement of approximately $2.8 million, which have been recorded
as other assets and are being amortized to interest expense over the life of the
debentures. The Company has filed
a shelf registration statement with the SEC covering resales of the debentures
and the common stock issuable upon conversion of the debentures, which was
declared effective on May 9, 2005.





Holders
may convert their debentures at any
time at the conversion rate prior to the close of business on the business day
prior to the maturity date or, if the debentures are called for redemption, on
the business day prior to the redemption date. The initial conversion rate is
43.9560 shares of the Company’s common stock for each $1,000 principal amount of
debentures. In addition, if certain corporate transactions that constitute a
change of control occur on or prior to January 15, 2012, the Company will
increase the conversion rate in certain circumstances, unless such transactions
constitute a public acquirer change of control and the Company elects to satisfy
its conversion obligation with public acquirer common stock. The Company may
redeem for cash the debentures in whole or in part at any time beginning on
January 15, 2008 and prior to January 15, 2012, at a redemption price equal to
100% of the principal amount of the debentures to be redeemed, plus accrued and
unpaid interest, including liquidated damages, if any, to but excluding the
redemption date, provided the last reported sale price of the Company’s common
stock has exceeded 140% of the conversion price for at least 20 trading days in
any consecutive 30-day trading period ending on the trading day prior to the
date of mailing of the notice of redemption. On or after January 20, 2012, the
Company may redeem for cash some of or all the debentures at any time at a
redemption price equal to 100% of the principal amount of the debentures to be
redeemed, plus any accrued and unpaid interest, including liquidated damages, if
any, to but excluding the redemption date.





**6.
Equity Transactions**





On
January 20, 2005, the holder of the line of credit promissory note converted the
entire balance of the note and the accrued interest into 1,180,246 shares of the
Company’s common stock.





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 gross proceeds of $10.0 million. Pursuant
to the securities purchase agreement and registration rights agreement, the
Company filed a registration statement for the registrable securities, which was
declared effective on April 15, 2004.





**7.
Merck Agreement**





On August
5, 2004, the Company entered into an agreement with a subsidiary of Merck &
Co. Inc., or Merck, for the worldwide development and commercialization of DOV
21,947 for all therapeutic indications and of DOV 216,303 for the treatment of
depression, anxiety and addiction. Additionally, Merck obtained rights of first
offer and refusal regarding a licensing agreement for DOV 102,677 under certain
circumstances and for additional consideration. Merck has assumed financial
responsibility for development and commercialization of a product containing at
least one of the licensed compounds. The parties have agreed to work together to
clinically develop licensed product and DOV has reserved the right to co-promote
the sales of product in the United States to psychiatrists and other specialists
who treat depression.





Under the
agreement, DOV received a $35.0 million upfront licensing payment. In addition,
the Company is entitled to receive milestone payments of up to $420.0 million,
as well as royalties on worldwide net sales, if any. In
accordance with the Emerging Issues Task Force (EITF) Issue No. 00-21,
“Accounting for Revenue Arrangements with Multiple Deliverables”  the
Company has evaluated the arrangement to determine if the deliverables are
separable into units of accounting and then applied applicable revenue
recognition criteria.  The Company has determined that the license and the
collaboration are a single element for accounting purposes. As a result, the $35
million upfront licensing payment and any future milestones received will be
recorded over the term of the collaboration.  As  the
Company has a continuing obligation with respect to collaboration on development
of product candidates, until an NDA is filed, the upfront payment has been
deferred and will be amortized to revenue over the estimated research and
development period of 51 months.




- 11
-




**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 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 and other indications.





We
sublicensed the worldwide
development and commercialization of 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 subsequently entered into a worldwide
development and commercialization agreement with Pfizer for indiplon. On August
5, 2004, we entered into an agreement with Merck for the worldwide development
and commercialization of all indications for DOV 21,947 and certain indications
for DOV 216,303 in
exchange for a $35.0 million up-front payment and the right to receive further
payments of up to $420.0 million upon the achievement of certain milestones and
royalties based on product net sales, if any. The up-front payment has been
deferred and is being amortized to revenue over the estimated research and
development period of 51 months. The time period of the development period is a
significant estimate used in the preparation of our financial statements and is
subject to Merck developing the compound in accordance with the last estimated
development schedule presented by Merck. As such this development period
estimate may fluctuate from period to period and this fluctuation might be
significant. For example, if as of January 1, 2005 we were to increase by 10%
the estimated development period, we would record approximately $749,000 less of
revenue in 2005. Future
milestone payments, if any, will also be recorded over the remaining term of the
collaboration. In 2004, we received a $2.0 million milestone payment from
Neurocrine for the NDA filing for indiplon. However, because Neurocrine has
reported that the original NDA filing was not accepted by the FDA and our
agreement with Neurocrine indicates that the $2.0 million milestone is earned
once an NDA has been submitted according to certain FDA regulations, we will not
record this payment as revenue until such time that a NDA has been accepted by
the FDA, Neurocrine refiled the NDA with the FDA on April 14, 2005. The payment
has been recorded as an accrued liability as of December 31, 2004 and March 31,
2005.





Since our
inception, we have incurred significant operating losses and we expect to do so
for the foreseeable future. As of March 31, 2005, we had an accumulated deficit
of $109.4 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. In
accordance with EITF 00-21, we evaluate all new agreements to determine if they
are a single unit of accounting or separable. 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.




- 12
-




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 associated with
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,
clinical and preclinical trial expenses, including toxicology studies, costs of
manufacturing clinical and preclinical trial materials and preclinical studies,
and professional fees related to clinical trials. Research and development
expense also includes our expenses related to development activities of 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 have recently initiated three Phase III clinical trials for bicifadine, a Phase
III clinical trial for ocinaplon and a Phase I clinical trial for DOV 102,677.
In 2005, we intend to initiate four pivotal efficacy clinical trials, two Phase
II clinical trials and additional Phase I clinical trials for bicifadine,
additional Phase I clinical trials and a Phase II clinical trial for DOV
102,677, a Phase I clinical trial for DOV 51,892 and a Phase I clinical trial
for DOV diltiazem. In addition, we intend to continue the clinical development
of DOV 216,303 for retained indications, that is, other than depression, anxiety
and addiction. We also expect to increase our expenditures in fortifying our
patent portfolio for each of our lead product candidates.





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. In May 2004, Elan converted the entire
outstanding principal and accrued interest of this note totaling $11.6 million
on that date into 2,907,162 shares of our common stock. 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 bearing interest at 10% per annum
compounded semi-annually on the amount outstanding. This convertible line of
credit promissory note was sold to an institutional holder during 2004 and upon
maturity on January 20, 2005, was converted into 1,180,246 shares of our
common stock. Please
refer to note 6 of our financial statements included
under Part I, Item 1of this Form
10-Q.





**Results
of Operations**





*Three
Months Ended March 31, 2005 and 2004*





*Revenue.*  Our
revenue for the three months ended March 31, 2005 was comprised of $2.1 million
of amortization of the $35.0 million fee we received on the signing of the
license, research and development agreement for our collaboration with Merck.
The up-front payment has been deferred and is being amortized to revenue over
the estimated research and development period of 51 months. We
recorded no revenue in the first quarter of 2004.


**


*Research
and Development Expense.* Research and development expense increased $4.3 million to $9.8 million for the
first quarter 2005 from $5.5 million for the comparable period in 2004. $3.6
million of the increase in research and development expense was associated with
increased clinical development costs including an increase of $2.3 million for
bicifadine, $1.1 million for DOV 102,677, $240,000 for ocinaplon, and $127,000
for DOV diltiazem offset by a decrease in clinical development costs of $32,000
for DOV 216,303 and $152,000 for DOV 21,947. The remaining increase in research
and development expense included an increase of $405,000 for preclinical
development and $389,000 for payroll and associated overhead related to research
and development, attributable to an overall increase in personnel, offset by a
decrease in professional fees of $127,000. The net decrease in professional fees
primarily related to a decrease in non-cash stock compensation to outside
consultants of $370,000 offset by an increase of $165,000 in recruitment fees
for personnel and $73,000 of legal fees related to patent filings.





*General
and Administrative Expense.* General and administrative expense increased $375,000 to $1.6 million for the
first quarter 2005 from $1.3 million for the comparable period in 2004. The
increase was primarily attributable to an increase of $211,000 in legal expense,
$105,000 in payroll and related overhead and $45,000 in office and related
expenses.




- 13
-




*Interest
Income.* Interest income increased $721,000 to $879,000 in the first quarter 2005 from
$158,000 in the comparable period in 2004 primarily due to higher average cash
balances and a higher effective interest rate yield.





*Interest
Expense.* Interest expense decreased $481,000 to $601,000 in the first quarter 2005 from
$1.1 million in the comparable period in 2004. We recorded interest expense of
$1.1 million on our convertible promissory note and convertible line of credit
promissory note in the first quarter of 2004 and $105,000 in the comparable
period in 2005. This decrease was due to the conversion of the notes in May 2004
and January 2005. This decrease was offset by an increase of $495,000 in
interest expense on the convertible debentures placed in December 2004 and
January 2005. Please
refer to note 5 of our financial statements included
under Part I, Item 1of this Form
10-Q.





*Other
Income (Expense), net.* Other income (expense), net was virtually unchanged in the first quarter of 2005
from the comparable period in 2004.





**Liquidity
and Capital Resources**





At March
31, 2005, our cash and cash equivalents and marketable securities totaled $137.0
million compared with $132.2 million at December 31, 2004. The increase in cash
balances at March 31, 2005 resulted primarily from cash provided by financing
activities of $14.9 million offset by cash used in operations of $9.5 million.
At March 31, 2005, we had working capital of $96.4 million compared with $91.3
million at December 31, 2004.





Net cash
used in operations during the quarter ended March 31, 2005 amounted to $9.5
million, as compared to $4.3 million in the same period of 2004. 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.
Net non-cash (income) expense related to stock-based compensation, interest
expense and depreciation and amortization expenses were $(82,000) in the three
months ended March 31, 2005 and $1.3 million in the comparable period in 2004.
Stock-based compensation for options issued to consultants in previous periods
resulted in a net income as the value of our common stock decreased from
December 31, 2004 to March 31, 2005, the measurement date of the
expense.





Net cash
provided by/used in investing activities during the quarter ended March 31, 2005
and 2004 amounted to $22.3 million used in operations and $2.4 million provided
by operations, respectively. This fluctuation resulted primarily from the timing
differences in investment purchases, sales and maturities and the fluctuations
in our portfolio mix between cash equivalents and short-term investment
holdings. We expect similar fluctuations to continue in future periods.





Net cash
provided by financing activities during the quarter ended March 31, 2005 was
$14.9 million as compared to $10.3 million in the comparable period in 2004. Net cash
provided by financing activities in the quarter ended March
31, 2005 was primarily related to net proceeds of $14.6 million from the
issuance of $15.0 million of 2.5% subordinated convertible debentures in January
2005. Net cash
provided by financing activities in the quarter ended March 31, 2004 was
primarily related to $10.0 million of net proceeds from the sale of common stock
to an institutional investor .





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 mid-2006. Our future capital uses and requirements depend on
numerous factors, including:





·
    our
      progress with research and development;





·
    our
      ability to maintain and establish, and the scope of, collaborations that
      finance research and development of our clinical candidates;





·
    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; and





·
    the
      noteholders’ choice of having the notes repaid in cash or converting the
      notes into our common stock.




- 14
-




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, Pfizer and Merck, may
encounter conflicts of interest, changes in business or clinical strategy, 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. Merck has
reserved the right to terminate its license with us upon four months
notice.





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, or available on an
acceptable basis, 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 ope rations
from period to period.





**Contractual
Obligations**





Future
minimum payments for all contractual obligations for years subsequent to March
31, 2005, are as follows:





**Years
      Ended December 31,****2005**
    
    **2006**
    
    **2007**
    
    **Thereafter**
    
    **Total******
    
    **(in
      thousands)**Convertible subordinated debentures(1)
    
    $
    2,041
    
    $
    2,000
    
    $
    2,000
    
    $
    114,000
    
    $
    120,041Operating
      leases
    
    
    414
    
    
    570
    
    
    574
    
    
    306
    
    
    1,864Total
    
    $
    2,455
    
    $
    2,570
    
    $
    2,574
    
    $
    114,306
    
    $
    121,905


(1)
    Included
      are interest payments of approximately $2.0 million annually through
      2025.





The table
above excludes future milestones and royalties that 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 royalties under these agreements in
2005. In May 1998, we licensed from Wyeth, on an exclusive, worldwide
basis, indiplon, bicifadine, ocinaplon and DOV 216,303. 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. In
February 2004, we entered into agreements to reorganize our exclusive license
agreement with Wyeth in respect of these four compounds 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
$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. As we have licensed certain rights to
DOV 216,303 to Merck the next milestone payable to them of $2.5 million was
accelerated and paid in 2004. In addition, should Merck achieve sales on this
compound, we will owe Wyeth a royalty of 4.0% on those sales. 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 . In
connection with Elan’s license grant to us in October 2003, Elan is entitled to
receive up to an aggregate of $3.0 million when bicifadine and ocinaplon are
licensed or come to market. In connection with the Biovail separation agreement,
we face contingent
payments by us to Biovail of $3.0 million upon issuance of marketing
authorization for DOV diltiazem and up to $7.5 million based upon sales, if
any. The table also excludes any severance or termination payments that would be
due to certain of our employees under their employment contracts should they be
terminated without cause or terminate following a change of control prior to the
expiration of their contract term as the amounts are not determinable at this
time.





- 15
-





**Recent
Accounting Pronouncements**





In
December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.”  SFAS
No. 123R is a revision of FASB Statement 123, “Accounting for Stock-Based
Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to
Employees,” and its related implementation guidance. The Statement focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS No. 123R requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award. This
statement is effective as of the beginning of the first annual reporting period
that begins after June 15, 2005 and thus we will adopt the standard in the first
quarter of 2006.





As
permitted by SFAS 123, we currently account for share-based payments to
employees using APB Opinion 25’s intrinsic value method and, as such, we
generally recognize no compensation cost for employee stock options. The impact
of the adoption of SFAS 123R cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future. The adoption of
SFAS 123R’s fair value method is expected to have a significant impact on our
results of operations, although it will have no impact on our overall financial
position. Management has not yet completed the analysis of the ultimate impact
that this statement will have on our operating results or financial position,
nor the method of adoption for this new standard.





**ITEM
3.**  **Quantitative
and Qualitative Disclosures About Market Risks**





To date,
we have invested our cash balances with substantial 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. Due to
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(b) 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, 2005, under the supervision and
with the participation of our president, chief executive officer and secretary,
and our senior 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.





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. Effective
January 1, 2005, the Company implemented a new accounting application software.
The implementation has involved changes in systems that included internal
control over financial reporting, and accordingly, have required minor changes
to our system of internal control over financial reporting. We have reviewed the
internal controls over financial reporting affected by the implementation of the
new system and determined that there has been no material change in the internal
controls over financial reporting with the new accounting software.





- 16
-





**PART
II — OTHER INFORMATION**





**ITEM
1.**  **Legal
Proceedings**





We are
not a party to any material legal proceedings.





**ITEM
2.**  **Unregistered
Sale of Equity Securities and Use of Proceeds**





**Recent
Sales of Unregistered Securities**





On
January 20, 2005, the holder of the convertible promissory note converted the
principal and outstanding balance into 1,180,246 shares of our common stock. The
convertible promissory note was canceled upon its conversion. We did not receive
any cash proceeds in connection with the conversion. We believe that the
conversion was
exempt from the registration requirements of the Securities Act of 1933, as
amended by reason of Section 3(a)(9) thereof, based upon the fact that the
convertible promissory note was exchanged solely for shares of our common stock
and no commission or other remuneration was paid or given directly or indirectly
for soliciting the conversion.





**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.





**Risks
Related to Our Business**





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





Market
prices for securities of biopharmaceutical companies have been particularly
volatile. In
particular, our stock price experienced a substantial decline following our
initial public offering and has fluctuated between a high of $20.17 and a low of
$11.60 since January 1, 2004. 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;




·
    delays
      in initiating clinical trials;




·
    business
      or legal developments concerning our collaborators or licensees, including
      Merck, 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.




- 17
-




If any of
the foregoing risks occur, our stock price could fall and in some cases 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 exercise price of $10.00 per share. Upon issuance, we determined the
value of the warrants to be $2.2 million.





***If
our outstanding convertible debt is converted into shares of our common stock,
existing common stockholders will experience immediate equity dilution and, as a
result, our stock price may go down.***





The 2.5%
subordinated convertible debentures that we issued in December 2004 and January
2005 are convertible, at the option of the holders, into shares of our common
stock at initial conversion rates of 43.9560 shares of common stock per $1,000
principal amount of notes, or $22.75 per share, subject to adjustment in certain
circumstances. If all the debentures were converted at their initial conversion
rate, we would be required to issue approximately 3,516,484 shares of our common
stock. We have reserved shares of our authorized common stock for issuance upon
conversion of the notes and the debentures. If any of the debentures are
converted into shares of our common stock, our existing stockholders will
experience immediate equity dilution and our common stock price may be subject
to significant downward pressure.





***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, 2005, we have incurred significant
operating losses and, as of March 31, 2005, we had an accumulated deficit of
$109.4 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.




- 18
-




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, even if safe when taken alone, may
      interfere with the actions of other drugs taken at the same time such that
      its marketability is materially reduced;




·
    we
      may discover that a product candidate does not exhibit the expected
      therapeutic results in humans;




·
    a
      product candidate may lend itself to user abuse, in which case labeling
      may adversely affect its marketability;





·
    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 or
      delay in obtaining clinical trial material;




·
    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 clinical trial of
ocinaplon, our lead anti-anxiety product candidate, on hold and requested that
we produce additional safety information. We supplied this information to the
FDA and with FDA approval initiated a Phase III clinical trial in the fourth
quarter of 2004. Given the
uncertainty surrounding the regulatory and clinical trial process, we may not be
able to successfully advance the development of effective or safe, commercially
viable products including ocinaplon, or results from the pivotal clinical trial
for ocinaplon may lead the FDA to reinstate its clinical hold or to impose
requirements or conditions on clinical testing on the future clinical trial
program.





If we are
unable to successfully develop and commercialize any one or more 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. Our
partner Neurocrine filed an NDA for indiplon for the treatment of insomnia in
April 2005. All our
other 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. Additionally,
even after receipt of FDA approval, the FDA may request additional clinical
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.




- 19
-




As noted
above, in
October 2003, the FDA placed the start of our Phase III clinical trial of
ocinaplon, on hold and requested that we produce additional safety information. We
supplied this information to the FDA and with FDA approval initiated a Phase III
clinical trial in the fourth quarter of 2004.




On
September 28, 2004, we announced that we had initiated a pivotal, Phase III,
U.S. clinical trial in patients with moderate to severe chronic lower back pain.
This clinical trial is being conducted in accordance with a protocol (revised as
described below) that we originally submitted to the FDA in accordance with the
FDA’s special protocol assessment, or SPA, guidelines in May 2004. Following
submission of the protocol to the FDA, we had meetings with the agency to reach
agreement on the study design. Following our meeting with the FDA in September
2004, we revised the protocol in response to comments from the FDA, and
initiated this clinical trial in accordance with the revised protocol. We have
received oral confirmation from the FDA that the revised protocol is acceptable,
and have sought to obtain formal documentation of the agreement from the FDA
regarding this revised protocol as required by the FDA’s SPA guidelines. We have
subsequently made changes to the protocol covered by the SPA prior to FDA
approval in order to improve the clinical trial and have sought the agency’s
approval to continue the SPA. According to FDA guidelines on SPA, protocol
changes in any manner without prior FDA approval renders the SPA no longer
effective and we cannot offer any assurance that our request will be granted.
While FDA guidance on SPAs states that documented SPAs should be considered
binding on the review division, the FDA has the latitude to change its
assessment if certain exceptions apply. Exceptions include identification of a
substantial scientific issue essential to safety or efficacy testing that later
comes to light, a failure to follow the protocol agreed upon or the FDA’s
reliance on data, assumptions or information determined to be wrong or that omit
relevant facts. Accordingly, we can give no assurance that as clinical trials
proceed or as part of an NDA review process, if any, the FDA will not determine
that one or more exceptions apply to a previously documented special protocol
assessment for the particular protocol. This could have a material adverse
effect on the NDA approval process, if any.




***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.





***We
rely on the efforts of Neurocrine and Pfizer and Merck for the development,
design and implementation of clinical trials, regulatory approval and
commercialization of indiplon and our product candidates DOV 216,303 and DOV
21,947.***





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 for indiplon. In August
2004, we sublicensed DOV 216,303 for certain indications and DOV 21,947 for all
indications to Merck without retaining any material rights other than our
participation in the ongoing clinical plan collaboration, the right to receive
milestone payments and royalties on product sales, if any, and co-promotion. The
clinical development, design and implementation of clinical trials, the
preparation of filings for FDA approval and, if approved, the subsequent
commercialization of these product candidates are within the control of our
partners. We will lack control over the process and, as a result, our ability to
receive any revenue from these product candidates is dependent on the success of
their efforts. Our partners may fail or otherwise decide not, or otherwise not
have the ability, to devote the resources necessary to successfully develop and
commercialize the product candidates, which would impair our ability to receive
milestone or royalty payments, if any, in respect of the product
candidates.





***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 Merck, 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, or changes in business
strategy, 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.




- 20
-





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. 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. 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 or our licensees or collaborators 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.





***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 and our ability to compete in collaborative agreements.
In addition, certain of our agreements no longer effective have involved, among
other things, restrictions on the issuance of debt and equity securities and
limitations on our ability to license our product candidates to third parties.
Because of existing 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 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, 2005, we had cash and cash equivalents and marketable securities of $137.0
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 mid-2006. We believe that we may require
additional funding 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 to us as we need
them, we may be required to curtail significantly or eliminate at least
temporarily one or more of our product development programs.




- 21
-


******


***Our
indebtedness and debt service obligations may adversely affect our cash flow,
cash position and stock price.***





In
December 2004 and January 2005, we sold $80.0 million aggregate principal amount
of 2.5% subordinated convertible debentures due in January 2025. Our annual debt
service obligation on these debentures is $2.0 million. The holders of the
debentures may require us to purchase all or a portion of their debentures on
January 15, 2012, January 15, 2015 and January 15, 2020. If we issue other debt
securities in the future, our debt service obligations may increase further.





We intend
to fulfill our debt service obligations from our existing cash, cash equivalents
and marketable securities. In the future, if the holders require us to purchase
all or a portion of their debentures and we are unable to generate cash or raise
additional cash through financings sufficient to meet these obligations, we may
have to delay or curtail research, development and commercialization programs.
The holders’ right to require us to purchase the debentures, prior to maturity
in January 2025, may be exercised in January 2012, 2015 and 2020.





***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.





***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 filed and 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.




- 22
-




***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.





We may
determine to acquire laboratory facilities, which we currently do not have. The
absence of such facilities and technical staff requires us to rely on contract
parties for all preclinical work. Such facilities, even if they lead to cost
savings and improved control and turn-around time, may require substantial
management time, personnel transition and relocation costs and result in a
higher level of fixed overhead, the cost of which might not be offset or fully
offset by reductions in external contract costs.





***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 and 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.





***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.




- 23
-


****


**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 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 or 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.





***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.




- 24
-




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 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 U.S. Patent and Trademark
Office may be necessary to determine the priority of inventions with respect to
our patent applications or those of our collaborators or 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.





***Our
ability to receive royalties and profits from product sales depends in part upon
the availability of approved 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.




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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. If such
reimbursement approval is denied or delayed, the marketability of our product
candidates could be materially impaired.





***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.





***We
may not be able to utilize any or all our net operating losses to offset future
taxable income.***





As a
company experiencing growth through the sale of equity, we may be limited under
the tax code in the tax deductions we can take against income for net operating
loss carryforwards if during the three years preceding such income shareholder
control of our company changed to a significant degree or if our research and
development expenditures were classified as having been incurred by our Irish
subsidiary Nascime Limited.





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**ITEM
6.**  **Exhibits**





(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-14(a) and 15d-14(a), 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-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.





32
    Certifications
      of Chief Executive Officer and 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.







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**SIGNATURES**





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




DOVPharmaceutical,
      Inc.Date: May 9, 2005
    By:
    /s/ ARNOLD
      S. LIPPAName:Arnold
      S. LippaTitle:Chief
      Executive Officer, President and
Secretary




DOVPharmaceutical,
      Inc.Date: May 9, 2005
    By:
    /s/ BARBARA
      G. DUNCANName:Barbara
      G. DuncanTitle:Senior
      Vice President of Finance and Chief Financial
    Officer


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