**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 1O-Q**

**(MarkOne)**

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

 

**Commission File Number: 0-50523**

**PHARMACOPEIA,INC.**

(Exact name ofregistrant as specified in its charter)

| **Delaware**                                                     |   | **51-0418085**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **P.O. Box  5350, Princeton, New Jersey**                   |   | **08543-5350**                        |
| (Address of  principal executive offices)                        |   | (Zip Code)                            |

 

**(609)452-3600**

(Registrant’stelephone number, including area code)

(Former name,former address and former fiscal year, if changed since last report)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or such shorter period that the registrant was required tofile such reports) and (2) has been subject to such filing requirementsfor the past 90 days.    Yes x     No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

Large acceleratedfiler   o   Acceleratedfiler   o   Non-acceleratedfiler   x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o   No x

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:

| Class                          | ** ** | **Outstanding at July 31, 2007** |
|--------------------------------|------------|----------------------------------|
| Common Stock,  $0.01 par value |       | **29,553,451**                   |

 

 

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**PHARMACOPEIA, INC.**

**Form 10-Q**

**Table of Contents**
| **Item**           | ** ** | ** **                                                                                       | ** ** | ** ** |
|--------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------|
|               |       |                                                                                             |       |       |
| PART I.       |       | FINANCIAL INFORMATION                                                                            |       | 3          |
|               |       |                                                                                             |       |       |
| Item 1.            |       | Consolidated  Financial Statements (Unaudited):                                                  |       | 3          |
|               |       |                                                                                             |       |       |
|               |       | Consolidated Balance Sheets as of June 30, 2007 and  December 31, 2006                           |       | 3          |
|               |       |                                                                                             |       |       |
|               |       | Consolidated Statements of Operations for the Three  and Six Months Ended June 30, 2007 and 2006 |       | 4          |
|               |       |                                                                                             |       |       |
|               |       | Consolidated Statements of Cash Flows for the Six  Months Ended June 30, 2007 and 2006           |       | 5          |
|               |       |                                                                                             |       |       |
|               |       | Notes to Unaudited Consolidated Financial Statements                                             |       | 6          |
|               |       |                                                                                             |       |       |
| Item 2.            |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations      |       | 14         |
|               |       |                                                                                             |       |       |
| Item 3.            |       | Quantitative  and Qualitative Disclosures about Market Risk                                      |       | 24         |
|               |       |                                                                                             |       |       |
| Item 4.            |       | Controls and  Procedures                                                                         |       | 24         |
|               |       |                                                                                             |       |       |
| PART II.      |       | OTHER INFORMATION                                                                                |       | 24         |
|               |       |                                                                                             |       |       |
| Item 1.            |       | Legal  Proceedings                                                                               |       | 24         |
|               |       |                                                                                             |       |       |
| Item 1A.           |       | Risk  Factors                                                                                    |       | 24         |
|               |       |                                                                                             |       |       |
| Item 2.            |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                     |       | 26         |
|               |       |                                                                                             |       |       |
| Item 3.            |       | Defaults upon  Senior Securities                                                                 |       | 26         |
|               |       |                                                                                             |       |       |
| Item 4.            |       | Submission of  Matters to a Vote of Security Holders                                             |       | 26         |
|               |       |                                                                                             |       |       |
| Item 5.            |       | Other  Information                                                                               |       | 27         |
|               |       |                                                                                             |       |       |
| Item 6.            |       | Exhibits                                                                                         |       | 27         |
|               |       |                                                                                             |       |       |
| Signatures         |       | 28                                                                                               |
|               |       |                                                                                             |       |       |
| Index to  Exhibits |       | 29                                                                                               |

 

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**PART I - FINANCIAL INFORMATION**

**Item 1. Consolidated Financial Statements(Unaudited)**

**Pharmacopeia, Inc.Consolidated Balance Sheets**

**(Amounts in thousands, except share andper share data)**
| ** **                                                                                                                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                          | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| ** **                                                                                                                          | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                          | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                     |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                          |       | $                 | 91,662     |                  | $          | 43,099 |   |
| Marketable  securities                                                                                                              |       | 1,024             |       | 3,041                 |       |
| Accounts  receivable, net                                                                                                           |       | —            |       | 5,006                 |       |
| Prepaid expenses  and other current assets                                                                                          |       | 1,502             |       | 1,498                 |       |
| Total current  assets                                                                                                               |       | 94,188            |       | 52,644                |       |
|                                                                                                                                |       |              |       |                  |       |
| Property and equipment,  net                                                                                                        |       | 11,887            |       | 11,287                |       |
| Deferred compensation  plan assets                                                                                                  |       | 2,066             |       | 2,022                 |       |
| Other assets                                                                                                                        |       | 144               |       | 174                   |       |
| Total assets                                                                                                                        |       | $                 | 108,285    |                  | $          | 66,127 |   |
|                                                                                                                                |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                      | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                                |       |              |       |                  |       |
| Accounts payable                                                                                                                    |       | $                 | 3,399      |                  | $          | 2,491 |   |
| Accrued  liabilities                                                                                                                |       | 3,610             |       | 3,346                 |       |
| Deferred  revenue, current portion                                                                                                  |       | 14,785            |       | 8,535                 |       |
| Notes payable,  current portion                                                                                                     |       | 135               |       | —                |       |
| Warrant  liability                                                                                                                  |       | 5,446             |       | 4,378                 |       |
| Total current  liabilities                                                                                                          |       | 27,375            |       | 18,750                |       |
|                                                                                                                                |       |              |       |                  |       |
| Deferred revenue,  long-term                                                                                                        |       | 25,007            |       | 13,813                |       |
| Deferred compensation  plan                                                                                                         |       | 2,066             |       | 2,022                 |       |
| Notes payable,  long-term                                                                                                           |       | 404               |       | —                |       |
| Other liabilities,  long-term                                                                                                       |       | 925               |       | 1,111                 |       |
|                                                                                                                                |       |              |       |                  |       |
| Commitments and  contingencies                                                                                                      |       | —            |       | —                |       |
|                                                                                                                                |       |              |       |                  |       |
| Stockholders’ equity:                                                                                                          |       |              |       |                  |       |
| Preferred stock,  $.01 par value, 2,500,000 shares authorized, none issued and outstanding                                          |       | —            |       | —                |       |
| Common stock,  $.01 par value, 50,000,000 shares authorized, 29,546,801 and 21,268,447  shares issued and outstanding, respectively |       | 295               |       | 213                   |       |
| Additional  paid-in capital                                                                                                         |       | 120,263           |       | 81,362                |       |
| Accumulated  deficit                                                                                                                |       | (68,046           | )          | (51,137               | )          |
| Accumulated  other comprehensive loss                                                                                               |       | (4                | )          | (7                    | )          |
| Total  stockholders’ equity                                                                                                    |       | 52,508            |       | 30,431                |       |
| Total liabilities and  stockholders’ equity                                                                                    |       | $                 | 108,285    |                  | $          | 66,127 |   |

 

See accompanyingnotes to these unaudited consolidated financial statements

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**Pharmacopeia, Inc.Consolidated Statements of Operations(Amounts in thousands, except share and per share data)**
| ** **                                                   | ** ** | **For the Three Months** | ** ** | **For the Six Months** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                   | ** ** | **Ended June 30,**            | ** ** | **Ended June 30,**          | ** ** |
| ** **                                                   | ** ** | **2007**                                | ** ** | **2006**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                   | ** ** | **(unaudited)**                         | ** ** | **(unaudited)**                       | ** ** |
| **Revenue**                                                  | ** ** | ** **                              | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenue                                                  |       | $                                       | 4,957      |                                  | $          | 3,292 |   | $ | 11,306 |   | $ | 7,408 |   |
|                                                         |       |                                    |       |                                  |       |   |   |   |   |
| **Operating  Expenses**                                      | ** ** | ** **                              | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Collaborative research and development expense               |       | 5,685                                   |       | 2,979                                 |       | 10,922 |   | 6,312 |   |
| Proprietary research and development expense                 |       | 5,033                                   |       | 5,468                                 |       | 12,451 |   | 11,760 |   |
| General and administrative expense                           |       | 2,771                                   |       | 2,424                                 |       | 5,459 |   | 4,871 |   |
| Total operating  expenses                                    |       | 13,489                                  |       | 10,871                                |       | 28,832 |   | 22,943 |   |
| Operating loss                                               |       | (8,532                                  | )          | (7,579                                | )          | (17,526 | ) | (15,535 | ) |
| Interest and other income                                    |       | 942                                     |       | 333                                   |       | 1,638 |   | 614 |   |
| Interest and other expense                                   |       | (5                                      | )          | —                                |       | (5 | ) | — |   |
| Change in warrant liability                                  |       | 638                                     |       | —                                |       | (1,068 | ) | — |   |
| Restructuring credits                                        |       | —                                  |       | 88                                    |       | — |   | 88 |   |
| Loss before  income taxes                                    |       | (6,957                                  | )          | (7,158                                | )          | (16,961 | ) | (14,833 | ) |
| (Benefit from) provision for income taxes                    |       | (52                                     | )          | 20                                    |       | (52 | ) | 28 |   |
| Net loss                                                     |       | $                                       | (6,905     | )                                     | $          | (7,178 | ) | $ | (16,909 | ) | $ | (14,861 | ) |
|                                                         |       |                                    |       |                                  |       |   |   |   |   |
| Net loss per  share:                                         |       |                                    |       |                                  |       |   |   |   |   |
| - Basic and diluted                                          |       | $                                       | (0.26      | )                                     | $          | (0.47 | ) | $ | (0.63 | ) | $ | (0.98 | ) |
|                                                         |       |                                    |       |                                  |       |   |   |   |   |
| Weighted average  number of common stock shares outstanding: |       |                                    |       |                                  |       |   |   |   |   |
| - Basic and  diluted                                         |       | 26,336,997                              |       | 15,263,977                            |       | 26,716,303 |   | 15,237,364 |   |

 

See accompanyingnotes to these unaudited consolidated financial statements

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**Pharmacopeia, Inc.Consolidated Statements of Cash Flows(Amounts in thousands)**
| ** **                                                                      | ** ** | **For the Six Months** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                      | ** ** | **Ended June 30,**          | ** ** |
| ** **                                                                      | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| ** **                                                                      | ** ** | **(unaudited)**                       | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                          |       |                                  |       |   |   |
| Net loss                                                                        |       | $                                     | (16,909    | ) | $ | (14,861 | ) |
| Adjustments to reconcile net loss to net cash provided  by operating activities |       |                                  |       |   |   |
| Depreciation and amortization                                                   |       | 1,073                                 |       | 961 |   |
| Change in warrant liability                                                     |       | 1,068                                 |       | — |   |
| Contribution of stock to 401(k) Plan                                            |       | 235                                   |       | 219 |   |
| Share-based compensation                                                        |       | 1,048                                 |       | 926 |   |
| Restructuring credits                                                           |       | —                                |       | (88 | ) |
| Gain on sale of property and equipment                                          |       | —                                |       | (3 | ) |
| Changes in assets and liabilities:                                              |       |                                  |       |   |   |
| Accounts receivable                                                             |       | 5,006                                 |       | 2,021 |   |
| Prepaid expenses and other current assets                                       |       | (4                                    | )          | (163 | ) |
| Other assets                                                                    |       | 30                                    |       | — |   |
| Accounts payable                                                                |       | 908                                   |       | 1,418 |   |
| Accrued and other liabilities                                                   |       | 78                                    |       | 752 |   |
| Restructuring reserve                                                           |       | —                                |       | (820 | ) |
| Deferred revenue                                                                |       | 17,444                                |       | 19,374 |   |
| Net cash provided by operating activities                                       |       | 9,977                                 |       | 9,736 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                          |       |                                  |       |   |   |
| Capital expenditures, net                                                       |       | (1,673                                | )          | (998 | ) |
| Proceeds from sale of property and equipment                                    |       | —                                |       | 3 |   |
| Purchases of marketable securities                                              |       | —                                |       | (1,000 | ) |
| Proceeds from sale and maturities of marketable  securities                     |       | 2,020                                 |       | 13,687 |   |
| Net cash provided by investing activities                                       |       | 347                                   |       | 11,692 |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                          |       |                                  |       |   |   |
| Proceeds from registered equity offering, net                                   |       | 37,070                                |       | — |   |
| Proceeds from exercise of stock options                                         |       | 630                                   |       | 907 |   |
| Proceeds from borrowings under line of credit, net                              |       | 539                                   |       | — |   |
| Net cash provided by financing activities                                       |       | 38,239                                |       | 907 |   |
| Net increase in  cash and equivalents                                           |       | 48,563                                |       | 22,335 |   |
| Cash and  equivalents, beginning of period                                      |       | 43,099                                |       | 11,680 |   |
| Cash and equivalents,  end of period                                            |       | $                                     | 91,662     |   | $ | 34,015 |   |
|                                                                                 |            |                                       |            |  |  |  |  |  |  |

 

See accompanying notes to theseunaudited consolidated financial statements

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**Pharmacopeia, Inc.Notes to Unaudited Consolidated Financial Statements**

**1.**              Background and Basis of Presentation

Pharmacopeia, Inc. (Pharmacopeia or the Company) wasincorporated in 2002 as Pharmacopeia Drug Discovery, Inc., a wholly ownedsubsidiary of Accelrys, Inc. (Accelrys). On April 30, 2004 (the distribution date), Accelrys spun-off 100percent of the shares of Pharmacopeia Drug Discovery, Inc. in a pro ratatax-free distribution and distributed to its stockholders of record one shareof Pharmacopeia Drug Discovery, Inc. common stock for every two shares ofAccelrys common stock held.  A total of12,181,471 shares were distributed. Effective May 3, 2007, Pharmacopeia Drug Discovery, Inc. changed itsname to Pharmacopeia, Inc.

Pharmacopeia is a biopharmaceuticalcompany committed to discovering and developing novel therapeutics to addresssignificant medical needs. Using proprietary technologies and processes, theCompany seeks to identify, optimize and develop novel drug candidates throughits own internally-funded drug discovery and development programs and incollaborations with major pharmaceutical and biotechnology companies.  The Company has one internal program in Phase1 clinical development and several internal programs in advanceddiscovery.  Its collaborative researchefforts have resulted in a portfolio of five partnered programs in active humanclinical trials, with four additional partnered programs in preclinicaldevelopment.

The consolidated financial statementsinclude the accounts of the Company and its wholly owned subsidiaryPharmacopeia UK Holdings Limited (Pharmacopeia UK), which was formed in March2007. All significant intercompany accounts and transactions have beeneliminated in consolidation.

The accompanying unaudited consolidated financialstatements have been prepared in accordance with U. S. generally acceptedaccounting principles for interim financial information and with instructionsto Form 10-Q and Article 10 of Regulation S-X. Accordingly, theseunaudited consolidated financial statements do not include all of theinformation and disclosures required by U. S. generally accepted accountingprinciples for complete consolidated financial statements. In the opinion ofmanagement, all adjustments (of a normal recurring nature) considered necessaryfor a fair presentation of the consolidated financial statements have beenincluded. Interim results are not necessarily indicative of the results thatmay be expected for the year. The unaudited interim consolidated financial statementsshould be read in conjunction with the financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006.

**2.**              **SignificantCollaborations**

**Collaboration and LicenseAgreement with Cephalon**

In May 2006, the Companyentered into a Collaboration and License Agreement (the Cephalon Agreement)with Cephalon, Inc. (Cephalon) providing for the formation of a new drugdiscovery, development and commercialization alliance.  The Company received an up-front,non-refundable payment of $15.0 million in June 2006 to support the Company’sresearch efforts under the Cephalon Agreement.

As part of and during theinitial phase of the alliance, Cephalon is responsible for providing hit andlead compounds.  The Company and Cephalonwill then work collaboratively to advance the lead compounds to preclinicaldevelopment candidates.  The Company isprincipally responsible for medicinal chemistry research and Cephalon providesbiology support, including preclinical disease models, as required by theCephalon Agreement. The Company has agreed that, for a specified period, itwill not screen its compound library for other collaborators, or for its ownaccount, against any target it works on under the Cephalon Agreement.

Upon the nomination, ifany, of preclinical development candidates by the alliance, Cephalon will beprimarily responsible for their development and commercialization.  The Company will retain an option to developcertain candidates from the alliance, subject to Cephalon’s agreeing to suchdevelopment.  For each preclinicaldevelopment candidate, if any, advanced under the alliance, the developingcompany will make clinical, regulatory and sales milestone payments to thenon-developing company.  In addition, thecompany commercializing each resulting product, if any, will pay thenon-commercializing company up to double-digit royalties based on the saleslevel achieved.

As stated above, under the Cephalon Agreement, the Companyreceived a non-refundable payment of $15.0 million and is principallyresponsible for performing medicinal chemistry research. The revenue for thisresearch is recognized on a 

6

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proportional performance basis, which is expected toapproximate straight-line recognition of revenue during the three-year term ofthe alliance.  The Company may receivemilestone payments, which would be recognized as revenue when the milestonesare achieved.  Included in deferred revenueat June 30, 2007 and 2006 was approximately $9.6 million and $14.6 million,respectively, related to the Cephalon Agreement, of which $4.6 million and $9.6million, respectively, was classified as long-term.  The Company’s revenue under theCephalon Agreement accounted for 25% and 13% of net revenue for the threemonths ended June 30, 2007 and 2006, respectively. For the six months endedJune 30, 2007 and 2006, theCompany’s alliance with Cephalon accounted for approximately 22% and 6%,respectively, of net revenue.  Theresearch activities under the Cephalon Agreement commenced in June 2006.

The Company and Cephaloneach have the right to terminate the Cephalon Agreement under certain specifiedcircumstances at any time during the term of the Cephalon Agreement.  In addition, Cephalon has the right to terminatethe Cephalon Agreement in its sole discretion, upon ninety days written noticeto the Company, during the three-year research phase of the alliance, whichphase may be extended by agreement of the parties.  No such termination shall require the Companyto refund to Cephalon any or all of the above funding.

One of the Company’sdirectors currently serves as the Chairman and Chief Executive Officer ofCephalon.

**Product Development andCommercialization Agreement with GSK**

In March 2006, the Company and SmithKlineBeecham Corporation and Glaxo Group Limited (together GSK) entered into aproduct development and commercialization agreement (the GSK Agreement). Underthe terms of the GSK Agreement, the Company may receive up to $15.0 million incash payments from GSK related to initial discovery activities to be conductedby the Company, including $5.0 million that the Company received in April 2006and $5.0 million that the Company received in June 2007. The remaining $5.0million will be payable to the Company upon its fulfillment of certainconditions related to the initial discovery activities to be conducted by theCompany. The Company’s role in the alliance is to (i) identify and (ii) advancemolecules in chosen therapeutic programs to development stage and (iii) subjectto certain provisions in the GSK Agreement, further develop the candidates toclinical “proof of concept” (a demonstration of efficacy in humans).

The GSK Agreement provides GSK anexclusive option, exercisable at defined points during the development processfor each program (up to the point of clinical proof of concept), to licensethat program. Upon licensing a program, GSK is obligated to conduct preclinicaldevelopment and/or clinical trials and commercialize pharmaceutical productsresulting from such licensed programs on a worldwide basis (the GSK LicenseObligations). In addition to the cash payments above, the Company is entitledto receive success-based milestone payments, starting in preclinical research,from GSK for each drug development program under the alliance and the potentialfor double-digit royalties upon the successful commercialization by GSK of anyproduct resulting therefrom.

In the event that GSK does not exerciseits option to license a program, the Company will retain all rights to thatprogram and may continue to develop the program and commercialize anyproducts resulting from the program, or it may elect to cease progressingthe program and/or seek other partners for further development andcommercialization.  Should the Companydevelop or partner such a program and commercialize any products resulting fromthat program, the Company will be obligated to pay GSK success-based milestonepayments and royalties upon successful commercialization, if any.

The Company has agreed that, for a specifiedperiod, it will not screen its compound library for other collaborators, or forits own account, against any target it screens under the GSK Agreement.

Since the inception ofthe GSK Agreement, the Company has received $10.0 million ($5.0 million inApril 2006, and $5.0 million in June 2007) in connection with initial discoveryand research activities the Company is obligated to perform under the GSKAgreement. The Company recorded deferred revenue associated with thesepayments, net of the fair value of the warrants described below, ofapproximately $9.5 million. As of June 30, 2007 and 2006, approximately $1.8million and $0.5 million, respectively, was classified in deferred revenue,current portion and approximately $6.7 million and $3.9 million, respectively,was classified in deferred revenue, long-term. The Company recognizes revenueon a proportional performance basis as it performs the required discoveryactivities in an amount from time to time less than or equal to thenon-refundable portion of payments received in connection with the GSKAgreement.  For the three months endedJune 30, 2007 and 2006, the Company recognized revenue of approximately $468thousand and $51 thousand, respectively, under the GSK Agreement. For the sixmonths ended June 30, 2007 and 2006, the Company recognized revenue ofapproximately $706 thousand and $51 thousand, respectively, under the GSKAgreement. The research activities under the GSK Agreement commenced in April2006.

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In connection with the GSK Agreement, theCompany issued two warrants to GSK for the purchase of up to anaggregate of 176,367 shares of its common stock at an exercise price of $5.67per share, which was a 25% premium over the trailing 30-day closing priceaverage preceding March 24, 2006. The warrants are exercisable at any timebefore the earlier to occur of (i) March 24, 2011 and (ii) theeffective date of certain types of terminations of the GSK Agreement. Thesewarrants were issued in a transaction not involving a public offering under Section 4(2) ofthe Securities Act of 1933, as amended. The fair value of the warrants has beendetermined to be $505 thousand. This amount was calculated using theBlack-Scholes pricing model with the following assumptions: 80% volatility;expected term of 5 years; 4.66% risk-free rate; and 0% dividend.

The Company and GSK each have the right toterminate the GSK Agreement in its sole discretion under certain specifiedcircumstances at any time during the term of the GSK Agreement. In addition,the Company and GSK each have the right to terminate the GSK Agreement underother circumstances that are customary in these types of agreements.  If the Company exercises its discretionarytermination right at any time during the first five years of the term, under certaincircumstances, it could be required to refund to GSK a portion of the up to$15.0 million related to initial discovery activities to be conducted by theCompany referred to above.  The amount ofany such refund will be calculated based upon when during the term of the GSKAgreement that termination occurs and the amount of research funding theCompany had received prior to such termination. However, there are no instances where the deferred revenue would be amortizedbelow the amount that could be potentially refundable pursuant to the terms ofthe GSK Agreement.  Further, should GSK exercise its discretionarytermination rights, there are no provisions in the GSK Agreement that wouldrequire the Company to refund payments received relating to its performance ofinitial discovery activities or milestone payments received under the GSKAgreement.

**Collaboration and LicenseAgreement with Organon**

InFebruary 2007, the Company entered into an amended and restated collaborationand license agreement (the Organon Agreement) with N.V. Organon (Organon), providingfor the formation of a new alliance to discover, develop and commercializetherapeutic products across a broad range of therapeutic indications. The newalliance builds on the companies’ past collaborations, including the February2002 agreement between the Company and Organon (the 2002 Collaboration).

Under the OrganonAgreement, the Company received an up-front payment of $15.0 million in March2007 and is entitled to receive up to $4.0 million per year($20.0 million aggregate) in research funding over the five-year term ofthe research portion of the alliance.  The Organon Agreement also providesthat the Company waives its rights to receive further compensation (e.g. futuremilestone and royalty payments) with respect to programs resulting from leadseries identified by the Company and delivered to Organon under the 2002Collaboration and certain other programs from earlier agreements.  In June 2007, the Company received anadditional $1.0 million relating to the transfer to Organon of rights tocertain other research programs that the Company worked on under the 2002collaboration. 

The Organon Agreementprovides Pharmacopeia the option to purchase the right to co-develop andco-commercialize certain therapeutic candidates discovered through thealliance. For therapeutic candidates the Company does not elect to co-developand co-commercialize, Organon will retain exclusive development andcommercialization rights, and the Company will receive milestone payments as aresult of Organon’s successful advancement, if any, of each candidate throughclinical development, and up to double-digit royalties based oncommercialization of any resulting pharmaceutical products.

Since February 2007, theCompany has received $18.0 million in connection with the Organon Agreement(the $15.0 million up-front payment, $1.0 million for the transfer of rights tocertain programs from the 2002 collaboration, and two quarterly researchpayments of $1.0 million each), which the Company recorded as deferred revenue.As of June 30, 2007, approximately $5.9 million was classified in deferredrevenue, current portion and approximately $11.2 million was classified indeferred revenue, long-term. The Company recognizes revenue on a proportionalperformance basis as it performs research activities as provided in the OrganonAgreement. For the three and six months ended June 30, 2007, the Companyrecognized approximately 17% and 8%, respectively, in connection with theOrganon Agreement. 

Under the 2002 Collaboration, the Company had receivedquarterly research funding to conduct its drug discovery activities to identifyand optimize new drug candidates for multiple therapeutic targets provided byOrganon. Funding received in advance was recorded as deferred revenue. As ofJune 30, 2006, approximately $2.3 million was recorded as deferred revenue,current portion. The research term of 2002 Collaboration ended in February 2007and therefore the Company did not recognize any revenue from the 2002Collaboration in the three months ended June 30, 2007. Research funding fromthe 2002 Collaboration was recognized as revenue on a proportional performancebasis, which approximated straight-line recognition over the term of theagreement.  

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Under the Organon Agreement and the 2002 Collaboration, theCompany recognized approximately 17% and 26%, respectively, of net revenue forthe three months ended June 30, 2007 and 2006. For the six months ended June30, 2007 and 2006, the Company recognized approximately 12% and 23%,respectively, of net revenue for the period under these collaborations.

BothPharmacopeia and Organon have the right to terminate the Organon Agreementunder certain specified circumstances at any time during the term of the OrganonAgreement.   In addition, the Company and Organon each havethe right to terminate the Organon Agreement under other circumstances that arecustomary in these types of agreements. Further, each party has the right, uponsix months prior written notice provided to the other party at any timebeginning two and one-half years after February 8, 2007, to terminate theresearch portion of the alliance and/or the Organon Agreement. Such atermination of the research portion of the alliance by Organon would not applyto Organon’s obligations with respect to any program developed by the alliancethat Organon is advancing or to therapeutic candidates with respect to whichthe Company has previously exercised its option to purchase the right toco-develop and co-commercialize. Should Organon exercise its discretionarytermination right, there are no provisions in the Organon Agreement that wouldrequire the Company to refund payments received under the Organon Agreement. IfPharmacopeia exercises its discretionary termination right, under certaincircumstances, it could be subject to a termination fee of $5.0 million.Whether or not the Company is subject to the termination fee is based upon whenduring the term of the Organon Agreement the Company’s discretionary terminationright is exercised. There will, however, be no instances where the deferredrevenue associated with the Organon Agreement would be amortized below $5.0million until such time as the Company is no longer subject to the terminationfee.

**Research and License Agreementwith Wyeth**

InDecember 2006, Pharmacopeia entered into a research and license agreement (theWyeth Agreement) with Wyeth, acting through its Wyeth Pharmaceuticals Division,providing for the formation of a new alliance based on the Company’s JanusKinase-3 (JAK3) inhibitor program.  The alliance’s goal is to identify, develop and commercializetherapeutic products for the treatment of certain immunological conditions inhumans.

The companies each havecertain exclusive rights to develop and commercialize products resulting fromthe JAK3 program and the alliance.  Pharmacopeia retains the right todevelop and commercialize therapeutic products for the treatment ofdermatological and ocular diseases employing topical administration and Wyethhas the right to develop human therapeutic products for all other indicationsand routes of delivery.  Under the terms of the Wyeth Agreement, inaddition to an up-front non-refundable $5.0 million cash payment that theCompany received in January 2007, the Company may also receive, over thethree-year research term that began in January 2007, up to $9.0 million inresearch funding.  In addition, the Company may receive up to $175.0million if Wyeth achieves preclinical and clinical development and regulatoryand commercialization milestones, as well as double-digit royalties on the netsales of any products commercialized by Wyeth under the alliance. Each companyis responsible for all development, regulatory, manufacturing andcommercialization activities for the products it develops and commercializes inits field.

In January 2007, theCompany received the $5.0 million up-front non-refundable payment, which hadbeen recorded as deferred revenue in December 2006. The revenuefor this research is recognized on a proportional performance basis, which isexpected to approximate straight-line recognition of revenue over the initialthree year term of the alliance. For the three and six months ended June 30, 2007, theCompany recognized approximately 24% and 21% of net revenue for each respectiveperiod under the Wyeth Agreement resulting in deferredrevenue at June 30, 2007 of $4.2 million, of which $2.5 million was classifiedas long-term. Theresearch term under the Wyeth Agreement commenced in January 2007. TheCompany may receive milestone payments upon the successful achievement, if any,of preclinical and clinical milestones. These milestone payments will berecognized as revenue when the milestones are achieved.

Pharmacopeiaand Wyeth each have the right to terminate the Wyeth Agreement under certainspecified circumstances at any time during the term of the WyethAgreement.  In addition, Wyeth has the right, upon six months’ priorwritten notice provided to the Company at any time after December 22, 2007, toterminate the research collaboration and/or the Wyeth Agreement in its entiretyor in part.  Such right to termination would not apply to Wyeth’sobligations with respect to any program developed by the collaboration andlicensed by Wyeth. No termination will require the Company to refund to Wyethany or all of the above cash payments.

**Collaboration and LicenseAgreements with Schering-Plough**

In April 2007, theCompany’s research activities under its collaborations with ScheringCorporation and Schering-Plough Ltd. (together Schering-Plough) were completed.Under the terms of the Company’s agreements with Schering-Plough,

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the cessation of theCompany’s research activities does not affect other areas of thecollaborations, including the ongoing Phase 2 and 1 clinical trials andmultiple preclinical programs that Schering-Plough is conducting. The Companywill continue to be entitled to payments resulting from the successfulachievement by Schering-Plough, if any, of preclinical and clinical milestones,as well as royalty payments from sales, if any, of products resulting fromcompounds already delivered by the Company and accepted by Schering-Ploughunder the collaborations. For the three months ended June 30, 2007 and 2006,the Company’s collaborations with Schering-Plough accounted for approximately21% and 45%, respectively, of net revenue in the period, including $1.0 millionin milestone revenue earned in 2007. For the six months ended June 30, 2007 and2006, the Company’s collaborations with Schering-Plough accounted forapproximately 25% and 55%, respectively, of net revenue in the period,including $2.0 million and $1.0 million in milestone revenue in 2007 and 2006,respectively. 

**Other Collaborations**

In the six months endedJune 30, 2007, as part of its collaboration with Biovitrum, the Company earnedapproximately 10% of its net revenue for the period, including $1.0 million inmilestone revenue. There was no revenue recognized during the three monthsended June 30, 2007 under the Company’s collaboration with Biovitrum.

**Other Items**

No other collaboratoraccounted for more than 10% of total revenue in the three or six month periodsended June 30, 2007 and 2006.

**3.****             ****License Agreement withBristol-Myers Squibb**

In March 2006, theCompany and Bristol-Myers Squibb Company (BMS) entered into an exclusivelicensing agreement providing the Company an exclusive license under certainBMS patents with respect to worldwide development and commercialization ofcertain compounds discovered by BMS that possess dual angiotensin andendothelin receptor antagonist (DARA) activity, including lead and backup DARAdevelopment candidates. In February 2007, the Company initiated Phase 1clinical trials with its product candidate PS433540. In April 2007, the Companypaid $1.0 million to BMS relating to the initiation of Phase 1 clinical trialsfor PS433540 in February 2007.  TheCompany will pay additional milestone payments, (including $2.0 million uponthe initiation, if any, of Phase 2 clinical trials) upon the achievement of furthersuccessive clinical and regulatory events in the United States and certainother jurisdictions, and royalties on sales of products, if any, resulting fromthe DARA program. The milestone payment in April 2007 was recorded asproprietary research and development expense in the six months ended June 30,2007. 

Under the terms of theagreement, in lieu of an up-front cash payment, the Company is providing BMS aset of compound libraries, over a period of approximately three years followingthe execution of the agreement. In the event the Company fails to deliver theaforementioned libraries to BMS, the Company would be required to make cashpayments to BMS on a pro rata basis of up to $1.9 million as of June 30, 2007.

The Company accounted forthis transaction in accordance with Accounting Principle Board Opinion 29, “Accountingfor Nonmonetary Transactions” as amended by Statement of Financial AccountingStandard (SFAS) No. 153 “Exchanges of Nonmonetary Assets.” The Companyestimated that the fair value of the compound library services to be providedto BMS is approximately $2.0 million. As such, and in accordance with SFAS No.2 “Accounting for Research and Development Costs,” the Company recorded anon-cash charge of $2.0 million to proprietary research and development expenseduring the three months ended June 30, 2006 and recorded a liability for theestimated fair value of the compound library services. As of June 30, 2007, theliability was approximately $1.8 million, of which approximately $0.9 millionis classified was other liabilities, long-term.

**4.****             ****Net LossPer Share**

The Company computes netloss per share in accordance with SFAS No. 128, “Earnings Per Share” (SFAS128). Under the provisions of SFAS 128, basic net loss per share is computed bydividing the net loss for the period by the weighted-average number of commonshares outstanding during the period. Diluted net loss per share is computed bydividing the net loss for the period by the weighted-average number of commonand dilutive common equivalent shares outstanding during the period. TheCompany had a net loss for the periods presented; accordingly, the inclusion ofcommon stock equivalents for outstanding stock options would be anti-dilutiveand, therefore, the weighted average shares used to calculate both basic anddiluted earnings per share are the same.

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**5.**              **Se****gment Information**

The Companyclassifies its business operations in one operating segment. All of the Company’srevenues are generated from this segment. Revenue was derived from customerslocated in the following geographic regions:
|                        | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **             | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006        ** | ** ** |
| Customers  located in: |       |                                                |       |                                              |       |   |   |   |   |
| United States          |       | 72                                                  | %          | 45                                                | %          | 66 | % | 36 | % |
| Europe                 |       | 28                                                  | %          | 55                                                | %          | 34 | % | 64 | % |

 

**6.****             ****S****hare-BasedCompensation**

Effective January 1, 2006, the Company adopted thefair value recognition provisions of SFAS No. 123 (revised 2004), “Share-BasedPayment” (SFAS 123R), using the modified-prospective transition method. Thisstatement is a revision to SFAS 123, supersedes Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) andamends SFAS No. 95, “Statement of Cash Flows.”  Under this transition method, compensationcost recognized includes compensation costs for all share-based paymentsgranted prior to, but not yet vested as of December 31, 2005 based on the grantdate fair value estimated in accordance with the original provisions of SFAS123, and compensation cost for all share-based payments granted subsequent toDecember 31, 2005 based on the grant date fair value estimated in accordancewith provisions of SFAS 123R.

The fair value of theseequity awards was estimated at the date of grant using the Black-Scholes optionpricing model with the following weighted average assumptions for the sixmonths ended June 30, 2007 and 2006, respectively:

|                          | ** ** | **2007**  | ** ** | ** ** | ** ** | **2006**  | ** ** |
|--------------------------|------------|-----------|------------|------------|------------|-----------|------------|
| Dividend yield           |       | 0         | %          |       |       | 0         | %          |
| Expected  volatility     |       | 80-90     | %          |       |       | 80-90     | %          |
| Risk-free  interest rate |       | 4.51-4.60 | %          |       |       | 4.66-5.06 | %          |
| Expected life (years)    |       | 6.25      |       |       |       | 6.25      |       |

 

For the three monthsended June 30, 2007 and 2006, total share-based compensation costs associatedwith the adoption of SFAS 123R was approximately $526 thousand and $490thousand, respectively, which includes approximately $79 thousand relating tothe accelerated vesting of certain stock options of a former executive of theCompany in May 2006. In addition to the expense incurred related to stockoption grants to employees, for the three months ended June 30, 2007 theCompany also incurred share-based compensation costs of approximately $9thousand related to stock options granted to consultants. For the three monthsended June 30, 2006, the Company had incurred share-based compensation costs ofapproximately $21 thousand related to the vesting of restricted stock grants toemployees. These grants were fully vested in March 2007 and thus, there was norelated expense in the three months ended June 30, 2007.

For the six months endedJune 30, 2007 and 2006, total share-based compensation costs associated withthe adoption of SFAS 123R was approximately $1.0 million and $884 thousand,respectively, which includes approximately $79 thousand relating to theaccelerated vesting of certain stock options of a former executive of theCompany in May 2006. In addition to the expense incurred related to stockoption grants to employees, the Company also incurred share-based compensationcosts of approximately $13 thousand and $42 thousand related to the vesting ofrestricted stock grants to employees for the six months ended June 30, 2007 and2006, respectively, and approximately $19 thousand related to stock optionsgranted to consultants for the six months ended June 30, 2007.

As of June 30, 2007,there was approximately $3.8 million of unrecognized compensation costs, net ofestimated forfeitures, related to share-based payments which are expected to berecognized over a weighted average period of 2.6 years.  Cash proceeds from stock options exercisedduring the three months ended June 30, 2007 and 2006 was approximately $113thousand and $171 thousand, respectively. Cash proceeds from stock optionsexercised during the six months ended June 30, 2007 and 2006 was approximately$630 thousand and $907 thousand, respectively.

**7.**              Warrant Liability

In connection with itsOctober 2006 financing, the Company issued approximately 1,450,000 warrants topurchase Pharmacopeia common stock. The Company follows Emerging Issues TaskForce (EITF) No. 00-19, “Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock” (EITF 00-19) in 

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accounting for itswarrants, which provides guidance for distinguishing between permanent equity,temporary equity and assets and liabilities. Under EITF 00-19, to qualify aspermanent equity, an equity derivative, including warrants, must permit theCompany to settle in unregistered shares. Under securities law, if the warrantswere issued in connection with a public offering and have a cash settlement featureat the holder’s option, the Company does not have the ability to settle inunregistered shares. Therefore, the warrants cannot be classified as permanentequity and are instead classified as a liability. The approximately 1,450,000warrants that the Company issued as part of its equity financing in October2006 meet this criteria and their fair value has been recorded as a liabilityin the accompanying balance sheets. Other warrants the Company had previouslyissued qualify as permanent equity and do not require remeasurement.

The Company records itswarrant liabilities at fair value using a Black-Scholes option-pricing modeland remeasures at each reporting date until the warrants are exercised or haveexpired. Changes in the fair value of the warrants are reported in thestatements of operations as income or expense. The fair value of the warrantscould be subject to significant fluctuation based on changes in the Company’sstock price, expected volatility, expected life, the risk-free interest rate anddividend yield. As of June 30, 2007, the fair value of the warrant liabilitydecreased to approximately $5.5 million from approximately $6.1 million as ofMarch 31, 2007, and as such, approximately $0.6 million was recorded asnon-operating income in the three months ended June 30, 2007. For the sixmonths ended June 30, 2007, the net increase in warrant liability wasapproximately $1.1 million, which has been recorded as non-operating expensefor the period. The assumptions used in the Black-Scholes option-pricing modelas of June 30, 2007 and December 31, 2006, respectively, were as follows:

|                          | ** ** | **June 30,** | ** ** | ** ** | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-------------------|------------|------------|------------|-----------------------|------------|
| ** **               | ** ** | **2007**          | ** ** | ** ** | ** ** | **2006**              | ** ** |
| Dividend yield           |       | 0                 | %          |       |       | 0                     | %          |
| Expected  volatility     |       | 80.00             | %          |       |       | 90.00                 | %          |
| Risk-free  interest rate |       | 4.92              | %          |       |       | 4.70                  | %          |
| Expected life  (years)   |       | 4.80              |       |       |       | 5.30                  |       |
| Stock Price              |       | $                 | 5.55       |       |       |                  | $          | 4.26 |   |
| Exercise Price           |       | $                 | 5.14       |       |       |                  | $          | 5.14 |   |

 

**8.****             ****Restructuringand severance obligations**

During the year ended December 31, 2004, the Companyexecuted a restructuring plan for the purpose of making its research anddevelopment activities more efficient by eliminating unnecessary facilities. Areduction in force of six administrative Pharmacopeia employees also occurredduring that year. As a result, restructuring related charges of approximately$5.9 million, as outlined below, were recognized as operating expenseduring the year ended December 31, 2004.

The following table summarizes theactivity and balance of the restructuring reserve at June 30, 2006 (inthousands):
|                                  | ** ** | **Severance Cost for** | ** ** | ** **                              | ** ** | ** ** | ** ** |
|----------------------------------|------------|----------------------------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                       | ** ** | **Involuntary Employee**    | ** ** | **Costs to Exit Leased** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Terminations**                 | ** ** | **Facility**                            | ** ** | **Total**  | ** ** |
| Restructuring  charges           |       | $                                | 132        |                                    | $          | 5,718      |       | $ | 5,850 |   |
| Utilization of  Reserves:        |       |                             |       |                                    |       |       |       |
| Cash payments                    |       | (132                             | )          | (5,172                                  | )          | (5304      | )          |
| Write-off Leasehold Improvements |       | —                           |       | (458                                    | )          | (458       | )          |
| Reserve  Adjustment              |       | —                           |       | (88                                     | )          | (88        | )          |
| Balance at June 30,  2006        |       | $                                | —     |                                    | $          | —     |       | $ | — |   |

 

In the three months endedJune 30, 2006, the Company made cash payments of approximately $198 thousandrelating to a former facility it leased through April 2006.  Additionally, the Company made an adjustmentof approximately $88 thousand to reduce its restructuring cost estimate toreflect actual restructuring costs and as such, as of June 30, 2006 there wereno liabilities relating to restructuring costs.

**9**.              Commitments andContingencies

**Product Development and Commercialization Agreementwith GSK**

Under the terms of theGSK Agreement, the Company and GSKeach have the right to terminate the GSK Agreement in its sole discretion undercertain specified circumstances at any time during the term of the GSKAgreement. In addition, the Company and GSK each have the right to terminatethe GSK Agreement under circumstances that are customary in these 

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types of agreements.  If the Companyexercises its discretionary termination right at any time during the first fiveyears of the term, under certain circumstances, it could be required to refundto GSK a portion of the up to $15.0 million related to initial discoveryactivities to be conducted by the Company under the GSK Agreement. The amountof any such refund will be calculated based upon when during the term of theGSK Agreement that termination occurs and the amount of research funding theCompany had received prior to such termination. However, there are no instances where the deferred revenue would beamortized below the amount that could be potentially refundable pursuant to theterms of the GSK Agreement.  Further, should GSK exercise itsdiscretionary termination rights, there are no provisions in the GSK Agreementthat would require the Company to refund payments received relating to itsperformance of initial discovery activities or milestone payments under the GSKAgreement.

The Company’s role in the alliance is to(i) identify and (ii) advance molecules in chosen therapeutic programs todevelopment stage and (iii) subject to certain provisions in the GSK Agreement,further develop the candidates to clinical “proof of concept” (a demonstrationof efficacy in humans). As of June 30, 2007, the Company had approximately $8.5million of deferred revenue related to services that are to be provided to GSKby the Company subsequent to June 30, 2007.

**License Agreement with BMS**

Under the terms of itsagreement with BMS, in lieu of an up-front cash payment, the Company isproviding BMS a set of compound libraries, over a period of approximately threeyears following the execution of the agreement. The Company recorded a liability for the estimated fair value of thecompound library services, which was approximately $1.8 million as of June 30,2007. In the event the Company fails to deliver the aforementioned libraries toBMS, the Company would be required to make cash payments on a pro rata basis ofup to approximately $1.9 million as of June 30, 2007.

In addition, the Companywill pay BMS milestone payments (including $2.0 million upon the initiation, ifany, of Phase 2 clinical trials) upon the achievement, if any, of successiveclinical and regulatory events in the United States and certain other jurisdictions,and royalties on sales of products, if any, resulting from the DARA program.

**Collaboration and LicenseAgreement with Cephalon**

Under the CephalonAgreement, the Company received an up-front, non-refundable payment of $15.0million in June 2006 to support the Company’s research efforts.  The Company is principally responsible forperforming medicinal chemistry research over the alliance term, as required bythe Cephalon Agreement. As of June 30, 2007, the Company had approximately $9.6million of deferred revenue related to services that are to be provided toCephalon by the Company subsequent to June 30, 2007.

**Collaboration and LicenseAgreement with Organon**

Under the OrganonAgreement, the Company has received $18.0 million (the $15.0 million up-front payment,$1.0 million for the transfer of rights to certain programs from the 2002collaboration, and two quarterly research payments of $1.0 million each) since February 2007 to support theCompany’s research efforts.  As of June30, 2007, the Company had approximately $17.1 million of deferred revenuerelated to services that are to be provided to Organon by the Companysubsequent to June 30, 2007.

In addition, if theCompany exercises its discretionary termination right, under certaincircumstances, it could be subject to a termination fee of $5.0 million.Whether or not the Company is subject to the termination fee is based upon whenduring the term of the Organon Agreement the Company exercises itsdiscretionary termination right. There will, however, be no instances where thedeferred revenue associated with the Organon Agreement would be amortized below$5.0 million until such time as the Company is no longer subject to thetermination fee.

**Research and License Agreementwith Wyeth**

Under the WyethAgreement, the Company received an up-front, non-refundable payment of $5.0million in January 2007 to support the Company’s research efforts.  As of June 30, 2007, the Company hadapproximately $4.2 million of deferred revenue related to services that are tobe provided to Wyeth by the Company subsequent to June 30, 2007.

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**Milestone and Royalty Commitments**

Under the terms ofcertain agreements to which the Company is a party, it is possible that theCompany may become obligated to pay aggregate milestone payments totaling up to$237 million upon the achievement of successive clinical and regulatory eventsand royalties on sales of products, if any, resulting from programs for whichthe Company has development responsibility under such agreements.  The Company will not be responsible for thepayment of future milestone and/or royalty payments in the event thatdevelopment of such a program is discontinued. Preclinical and clinical development of drug candidates is a long,expensive and uncertain process.  At anystage of the preclinical or clinical development process, the Company maydecide to discontinue the development of its product candidates.  To date, none of the compounds to which theCompany holds complete or partial rights has reached the stage of commercialproduct.  The Company expects that itsproduct candidates will not be commercially available for many years, if ever.

**10**.       Related Party Transaction

In May 2006, the Companyentered into the Cephalon Agreement.One of the Company’s directors currentlyserves as the Chairman and Chief Executive Officer of Cephalon. During thethree and six month periods ended June 30, 2007, the Company recognized revenueof approximately $1.3 million and $2.5 million, respectively, relating to thiscollaboration. During each of the three and six month periods ended June 30,2006, the Company recognized revenue of approximately $417 thousand,respectively, relating to this collaboration.

**11**.       Sale of Securities

In May 2007, the Companyissued and sold approximately 8.1 million shares of the Company’s common stockat a purchase price per share of $5.00 as part of a public underwrittenoffering.  The aggregate gross proceeds of the transaction wereapproximately $40.3 million. The proceeds the Company received from thetransaction, net of transaction costs, were approximately $37.1 million. The shares of common stock were sold through a prospectus supplement pursuantto one of the Company’s effective shelf registration statements.

**12.****      ****Line of Credit / Notes Payable**

The Company entered intoa Loan and Security Agreement (the Line of Credit) with a lending institution(the Lender) dated December 26, 2006. The Line of Credit is intended to provide the Company with funding forequipment and other internal use assets. Up to a total of $5.0 million in equipment fundings are available to theCompany from time to time under the Line of Credit through December 2008.  Each funding will have a fixed term of 48months for laboratory equipment and 36 months for all other collateralcategories.

On May 31, 2007, theCompany drew down approximately $486 thousand under the Line of Credit forlaboratory equipment purchases, which is payable over 48 months, andapproximately $67 thousand for other internal use equipment, which is payableover 36 months. Both notes payable carry a fixed interest rate of 10.28%. As ofJune 30, 2007, the balance of these loans was approximately $539 thousand, $404thousand of which is classified as notes payable, long-term.

**13.**       New Accounting Pronouncements

**Fair Value Measurements**

In September 2006, theFinancial Accounting Standards Board (FASB) issued SFAS No. 157, “Fair ValueMeasurements,” (SFAS 157). SFAS 157 establishes a framework for measuring fairvalue in accordance with generally accepted accounting principles and expandsdisclosures about fair value measurements. SFAS 157 is effective for fiscalyears beginning after November 15, 2007 and interim periods within those fiscalyears. The Company is currently evaluating the impact that SFAS No. 157 willhave on its consolidated financial statements.

**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

**FORWARD-LOOKINGSTATEMENTS**

This Report on Form 10-Q containsforward-looking statements regarding us and our business, financial condition,results of operations and prospects within the meaning of the PrivateSecurities Litigation Reform Act of 1995.  Such forward-looking statementsinclude those that express plans, anticipation, intent, contingency, goals, targetsor future development and/or otherwise are not statements of historicalfact.  These forward-looking statements are based on our currentexpectations and projections about future events and they are subject to risksand uncertainties known and unknown 

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that could cause actual results anddevelopments to differ materially from those expressed or implied in suchstatements.  These forward-looking statements include statements about thefollowing:

·                  our plansto develop PS433540, a product candidate from our DARA program;

·                  ourexisting and proposed Phase 1 clinical studies and proposed Phase 2clinical studies with respect to PS433540, including timing and expectedoutcomes of such studies;

·                  ourestimates of the market opportunity for our product candidates, includingPS433540;

·                  our abilityto successfully perform under our collaborations with Cephalon,GlaxoSmithKline, Organon and Wyeth;

·                  our ability tobuild our pipeline of novel drug candidates through our own internally-fundeddrug discovery and development programs, third party collaborations andin-licensing;

·                  our abilityto raise additional capital;

·                  our expectationsconcerning the development priorities of our collaborators, their ability tosuccessfully develop compounds and our receipt of milestones and royalties;

·                  ouranticipated operating results, financial condition, liquidity and capitalresources;

·                  ourexpectations concerning the legal protections afforded by U.S. andinternational patent laws;

·                  our ability topursue the development of new compounds and other business matters withoutinfringing the patent rights of others;

·                  our abilityto acquire or invest in complementary businesses or technologies; and

·                  additionalcompetition and changes in economic conditions.

In some cases, you can identifyforward-looking statements by terminology, such as “goals,” or “expects,” “anticipates,”“intends,” “plans,” “believes,” “seeks,” “estimates,” or the negative of suchterms or other similar expressions.  You are urged not to place unduereliance on any such forward-looking statements, any of which may turn out tobe wrong due to inaccurate assumptions, unknown risks, uncertainties or otherfactors.  Factors that could cause orcontribute to differences in results and outcomes from those in our forward-lookingstatements include, without limitation, those discussed elsewhere in thisReport in Part II, Item 1A. “Risk Factors” and in this Part I, Item 2, as wellas those discussed in our other Securities and Exchange Commission (SEC)filings.

We urge you to carefully read and considerthe disclosures found in these filings, all of which are available in the SECEDGAR database at www.sec.gov.  Weundertake no obligation to (and expressly disclaim any such obligation to)revise or update the statements made herein or the risk factors that may relatethereto whether as a result of new information, future events or otherwise.

The following discussionsshould be read in conjunction with the section of this Report entitled “RiskFactors”.

**TheCompany**

**Overview**

We are abiopharmaceutical company committed to discovering and developing noveltherapeutics to address significant medical needs. Using proprietarytechnologies and processes, we seek to identify, optimize and develop noveldrug candidates through our own internally-funded drug discovery anddevelopment programs and in collaborations with major pharmaceutical andbiotechnology companies.  We have oneinternal program in Phase 1 clinical development and several internal programsin advanced discovery.  Our collaborativeresearch efforts have resulted in a portfolio of five partnered programs inactive human clinical trials, with four additional partnered programs inpreclinical development.

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PS433540, a product candidate we aredeveloping internally, is in Phase 1 clinical development. PS433540 is aDual-Acting angiotensin and endothelin Receptor Antagonist (DARA) that wein-licensed from BMS and that is being developed as a potential treatment forcardiovascular diseases, including most importantly hypertension and diabeticnephropathy.  Our licensing agreementwith BMS provides us with an exclusive license under certain BMS patents withrespect to worldwide development and commercialization of PS433540, as well ascertain other compounds discovered by BMS that possess DARA activity.  We believe that PS433540 administered as asingle agent has the potential to have a superior efficacy profile tomonotherapy with an angiotensin receptor blocker for the potential treatment ofhypertension and diabetic nephropathy. In April 2007, we announced positive results from our first Phase 1clinical study with PS433540. Also in April 2007, we initiated a Phase 1multiple ascending dose study with PS433540, and in July 2007, we initiated aPhase 1 angiotensin II challenge study with PS433540. We plan to initiate aPhase 2a clincal trial in hypertension in the second half of 2007 and a secondPhase 2 clinical trial for PS433540 in hypertension in the first half of 2008.

We have concentrated ourinternal discovery programs primarily on diseases related to immunoregulation. Immunoregulatory indications could include rheumatoid arthritis, psoriasis,inflammatory bowel disease, multiple sclerosis and others. This focus builds onour expertise in the area, and also takes advantage of attractive commercialopportunities we believe exist. Our internal discovery efforts includedeveloping CCR1 antagonists to treat inflammatory diseases including rheumatoidarthritis and multiple sclerosis as well as programs directed at generating JAK3inhibitors for topical use in dermatological and ocular diseases. We havepartnered our JAK3 Inhibitors program with Wyeth for all indications and routesof delivery other than topical administration for dermatological and oculardiseases. We also have a discovery program focused on A2a antagonists to treatParkinson’s disease.  We fully fund ourinternal discovery programs and retain intellectual property and ownershiprights to any compounds discovered. At an appropriate point, we may license oneor more of these compounds or programs to a partner.

In addition to ourproprietary research and development, we currently have collaborations underwhich we are actively performing research and development activities withleading pharmaceutical and biotechnology companies, including Cephalon,GlaxoSmithKline, Organon and Wyeth. While the nature of our collaborative relationships vary with each ofthese companies, we retain certain development and/or commercialization rightsunder the terms of each agreement. We also have other agreements with leadingpharmaceutical and biotechnology companies, including Schering Corporation andSchering-Plough Ltd. (together Schering-Plough) and BMS, where we havecompleted our research activities and the partner is now responsible for thedevelopment of potential therapeutic products. Our collaborative researchefforts with Schering Plough and BMS have resulted in a portfolio that includesone partnered program currently in Phase 2 clinical trials targeting chronicobstructive pulmonary disease (COPD) and four partnered programs in activePhase 1 clinical trials targeting oncology and inflammatory diseases.

Associated with theseclinical development programs, we have received milestone payments fromSchering-Plough and BMS and, to the extent the compounds successfully progressthrough clinical development and registration, we will be entitled to receiveadditional milestone payments. We are also entitled to receive royalties on thecommercial sale, if any, of drugs resulting from these collaborations. However,numerous additional studies are required to fully assess the potential of theseclinical candidates before they reach the marketplace, and the results frompreclinical studies and clinical studies conducted to date with these compoundsare not necessarily indicative of the results that may be obtained in futureclinical studies.

In addition to thecompounds in clinical development, four more partnered programs are at variousstages of preclinical development, the point at which compounds are tested forsafety in animals and are subjected to other studies required prior to testingcompounds in humans.

Preclinical and clinicaldevelopment of drug candidates is a long, expensive and uncertain process. Wecontinue to pursue the discovery and development of product candidates in bothour internal and collaborative programs. The drug candidates described aboveare at early stages and none have received regulatory approval for commercialsale. All of the compounds face the substantial risk of failure inherent indrug discovery and development. At any stage of the clinical developmentprocess, we or our collaborators may decide to discontinue development of ourproduct candidates. To date, none of the compounds in which we hold complete orpartial rights has reached the stage of a commercial product and, although wehave received license and milestone fees, we may never receive any salesrevenues, royalty payments, or any additional license and milestone fees, underour current or any future collaborations. We do not expect that our productcandidates will be commercially available for many years, if ever.

From time to time we haveconsidered, and we will continue to consider strategic initiatives intended tofurther the development of our business. In addition, we consider opportunitiesto expand our product pipeline through the acquisition or in-licensing of, orinvestment in, product development candidates, and we intend to continue toexplore those opportunities.

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**Liquidity and Capital Resources**

As of June 30, 2007, we had cash, cash equivalents andmarketable securities of $92.7 million compared to $46.1 million at December31, 2006, representing 86% and 70% of our total assets, respectively. We makeinvestments in highly liquid investment-grade marketable securities, includingcorporate bonds and United States government and agency securities. As of June30, 2007, we had deferred revenue and other liabilities of approximately $41.6million relating to research and development activities that are to be providedby us subsequent to June 30, 2007, of which $25.9 million was classified aslong-term. The following is a summary of selected cash flow information for thesix months ended June 30, 2007 and 2006 (in thousands):
|                                            | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| Net loss                                   |       | $                                                 | (16,909    | ) | $ | (14,861 | ) |
| Adjustments for  noncash operating items   |       | 3,424                                             |       | 2,015 |   |
|                                       |       |                                              |       |   |   |
| Net cash  operating loss                   |       | (13,485                                           | )          | (12,846 | ) |
| Net change in  assets and liabilities      |       | 23,462                                            |       | 22,582 |   |
|                                       |       |                                              |       |   |   |
| Net cash  provided by operating activities |       | $                                                 | 9,977      |   | $ | 9,736 |   |
|                                       |       |                                              |       |   |   |
| Net cash  provided by investing activities |       | $                                                 | 347        |   | $ | 11,692 |   |
|                                       |       |                                              |       |   |   |
| Net cash  provided by financing activities |       | $                                                 | 38,239     |   | $ | 907 |   |

 

**Net cash provided by operating activities**

Net cash provided by operating activities for the sixmonths ended June 30, 2007 resulted primarily from the receipts of a $5.0million up-front non-refundable payment received in January 2007 relating tothe Wyeth Agreement, a $15.0 million up-front non-refundable payment receivedin February 2007 in connection with the Organon Agreement, and a $5.0 millionpayment received in June 2007 related to the second tranche of research fundingunder the GSK Agreement, offset by cash used to fund both our proprietaryinternal drug research and development efforts, including our Phase 1 clinicaltrials for PS433540, and the fulfillment of our research and developmentperformance obligations under our collaborations. Absent the receipt of the$25.0 million from Wyeth, Organon and GSK, our net cash used in operatingactivities would have been approximately $15.0 million.

Net cash provided by operating activities for the sixmonths ended June 30, 2006 was primarily due to the receipts of a $5.0 millionup-front payment received in April 2006 relating to the GSK Agreement and a$15.0 million up-front non-refundable payment received in June 2006 relating tothe Cephalon Agreement, offset by cash used to fund both our proprietaryinternal drug research and preclinical development efforts and the fulfillmentof our research and development performance obligations under ourcollaborations, as well as the payment of restructuring expenses related to the2004 consolidation of our facilities. Absent the receipt of the $20.0 millionfrom GSK and Cephalon, our net cash used in operating activities would havebeen approximately $10.3 million.

**Net cash provided by investing activities**

Net cash provided by investing activities for the sixmonths ended June 30, 2007 and 2006 related primarily to the net sales andmaturities of marketable securities, partially offset by capital expendituresfor laboratory and information technology equipment and software.

**Net cash provided by financingactivities**

In May 2007, weissued and sold approximately 8.1 million shares of our common stock at apurchase price per share of $5.00 as part of a public underwrittenoffering.  The aggregate gross proceeds of the transaction wereapproximately $40.3 million. The proceeds we received from the transaction, netof transaction costs, were approximately $37.1 million.  The shares ofcommon stock were sold through a prospectus supplement pursuant to one of oureffective shelf registration statements.

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Net cash provided by financing activities for the six monthsended June 30, 2007 also included proceeds, net of repayments, of approximately$539 thousand received from borrowings under our Line of Credit and proceedsfrom the issuance of common stock in connection with exercises of stockoptions.  Net cash provided by financingactivities for the six months ended June 30, 2006 related to proceeds from theissuance of common stock in connection with exercises of stock options.

**Liquidity and Capital Resources Outlook**

**Weexpect to continue to use our capital to fund our operations. We expect thatour research and development expenditures will continue to increase in thefuture as we increase our internal drug research and development efforts.Preclinical development studies and clinical trials are significant, time-consumingand costly processes. Conducting our own drug research and development is a keycomponent of our business model. PS433540, a product candidate from our DARAprogram that we are developing internally, is currently in Phase 1 clinicaltrials. **We plan to initiate a Phase 2a clinical trial in hypertension in thesecond half of 2007 and a second Phase 2 clinical trial in the first half of2008. Conducting these Phase 2 clinical trials will significantly increase ourproprietary research and development costs. Additionally, should such Phase 2 clinical trials be initiated, we wouldbe obligated to pay BMS $2.0 million relating to this achievement within 10days of such initiation.  In addition, as part of our collaborative agreementswith Cephalon, GSK, Organon and Wyeth, we have received up-front payments. Inconnection with these agreements, we are obligated to perform significantresearch and development activities over multiple years and as such, expect toincur significant costs performing such activities.

**On May 7, 2007, we issued and soldapproximately 8.1 million shares of our common stock at a purchase price pershare of $5.00 as part of a public underwritten offering. The aggregate grossproceeds of the transaction were approximately $40.3 million.  The proceeds we received from thetransaction, net of transaction costs, were approximately $37.1 million.  The shares of common stock were sold througha prospectus supplement pursuant to one of our effective shelf registrationstatements.**

We anticipate thatour capital resources will be adequate to fund our operations at their currentlevels at least through December 31, 2008. However, there can be no assurancethat changes will not occur that would consume available capital resourcesbefore then.

Our capitalrequirements depend on competing technological and market developments, changesin our existing collaborative relationships, progress of PS433540 in clinicaltrials, the cost of filing, prosecuting, defending, and enforcing patent claimsand other intellectual property rights and the outcome of related litigation,the purchase of additional capital equipment, acquisitions of other businessesor technologies, and the progress of our collaborators’ milestone and royaltyproducing activities. We will need to raise additional funds to finance ouroperating activities or enter into strategic initiatives intended to furtherthe development of our business. There can be no assurance that additionalfunding, if necessary, will be available to us on favorable terms, if at all.Our forecasts of the period of time through which our financial resources willbe adequate to support our operations are forward-looking information andactual results could vary. The factors described earlier in this section willimpact our future capital requirements and the adequacy of our available funds.

**Resultsof Operations**

This sectionshould be read in conjunction with the discussion under “Liquidity and CapitalResources”.

**Three months ended June30, 2007 and 2006**

Our net revenue increased 51% to $5.0 million in the three months ended June 30, 2007 compared to $3.3 million in the three monthsended June 30,2006. Net revenue consists ofresearch and development efforts we perform under our various collaborationagreements, as well as our earning of milestones, success fees and licenserevenue if and as our discoveries progress through our collaborators’development processes. Net revenue for the three months ended June 30, 2007 and 2006 is summarized as follows (in thousands):

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|                                              | ** ** | **For the three months ended June 30,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                                              | ** ** | **2006** | ** ** |
|                                         |       |                                                                  |       |   |   |
| Collaborative  research revenue              |       | $                                                                     | 3,806      |   | $ | 3,167 |   |
| Milestones, success fees and license revenue |       | 1,151                                                                 |       | 125 |   |
|                                         |
|                                         |       | $                                                                     | 4,957      |   | $ | 3,292 |   |

 

Cephalon accounted for 25% and 13% of our net revenue in the three monthsended June 30, 2007 and 2006, respectively. Wyeth accounted for 24% of our net revenue in the three months endedJune 30, 2007.  Our alliance with Wyethcommenced in January 2007 and therefore there was no corresponding revenue inthe three months ended June 30, 2006. Organon accounted for 17% and 26% of our net revenue in the three monthsended June 30, 2007 and 2006, respectively. Schering-Plough accounted for 21% and 45% of our net revenue in thethree months ended June30, 2007 and 2006, respectively,including $1.0 million of our milestone and success fees revenue recorded inthe three months ended June 30, 2007.

The increase in collaborative research revenue in the three months endedJune 30, 2007 versus the prior year period was largely due to our recentalliances with Cephalon, Wyeth, and GSK, partially offset by the decrease inresearch revenue that resulted from the completion of our research activitiesunder our collaborations with Schering-Plough in April 2007.

Collaborativeresearch and development expense includes the labor, material, equipment andallocated facilities cost of our scientific staff that is working oncollaborative partnerships. Collaborative research and development expensesincreased 91% to $5.7 million in the three months ended June 30, 2007compared to $3.0 million in the three months ended June 30, 2006. This increase relates to an increasein resources allocated to our recent alliances with GSK, Cephalon and Wyeth. InDecember 2006, we entered into the Wyeth Agreement in which we licensed certainrights to our JAK3 program to Wyeth. Prior to January 2007, the resources thatwere deployed on the JAK3 program were accounted for in proprietary researchand development expense. Resources deployed on our JAK3 program, as they relateto programs for employing topical administration for ocular and dermatologicaldiseases, have been and will continue to be accounted for in proprietaryresearch and development as we retain all rights to these programs. Thisincrease was offset by decreased resources allocated to our collaborations withSchering-Plough that resulted from the completion of our research activities inApril 2007.  Share-based compensationcosts associated with our adoption of SFAS 123R for the three months ended June30, 2007 and 2006 were $138 thousand and $80 thousand, respectively.

Proprietaryresearch and development expense includes research and development acquisitioncosts, labor, material, equipment and allocated facilities cost of scientificstaff working on self-funded internal drug discovery and development programs. Our mostadvanced internal program is our DARA program, which is in Phase 1 clinicaltrials. We licensed our DARA program from BMS in March 2006. In addition, wecurrently have several internal programs in advanced preclinical discovery.Proprietary research and development expenses decreased 8% to $5.0 million inthe three months ended June 30, 2007 compared to $5.5 million in the threemonths ended June 30, 2006.  Thisdecrease was primarily attributable to a decrease in costs related to our JAK3program and a reduction in resources allocated to our Adenosine A2a program. Aspreviously mentioned, certain aspects of our JAK3 program were partnered withWyeth in December 2006. The majority of the costs related to this program,previously incurred in proprietary research and development expense in priorperiods, are now categorized as collaborative research and development. Thisdecrease was offset by costs relating to the Phase 1 clinical trials forPS433540 and costs expended on our CCR1 discovery program. Share-basedcompensation costs associated with our adoption of SFAS 123R for the threemonths ended June 30, 2007 and 2006 were $76 thousand and $94 thousand,respectively. Because of the speculative nature of these internal drugdiscovery and development projects, it is not possible to estimate completiondates or costs of completion. Additionally, from time to time, certain staff andother research and development resources may be temporarily redirected from oneproject to another, which redirection may also delay or impact the cost ofinternal drug discovery and development projects.

General andadministrative expense increased by 14% to $2.8 million in the three monthsended June30, 2007 compared to $2.4 million in the three months ended June 30,2006.  The increase in general and administrative expense is primarilyattributable to increased consulting and share-based compensation costs duringthe three months ending June 30, 2007. Share-based compensation costs associated with our adoption of SFAS 123Rfor the three months ended June 30, 2007 and 2006 were $312 thousand and $237thousand, respectively.

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Interest and otherincome, net increased to $942 thousand in the three months ended June 30, 2007compared to $333 thousand in the three months ended June 30, 2006.  This increase is primarily dueto higher yields on our increased cash, cash equivalents, and marketablesecurities balances during the three months ended June 30, 2007 as compared tothe three months ended June 30, 2006.

The incomeassociated with the decrease in warrant liability represents the change in thefair value of the warrants that were issued in connection with our equityfinancing in October 2006, from March 31, 2007 to June 30, 2007. The fair valueof the warrants is determined using the Black-Scholes option-pricing model andis remeasured at each reporting period quarterly.

Increase in incometax benefit represents an adjustment to our estimated provision to reflectactual minimum taxes due.  We recorded noincome tax provision for the three months ended June 30, 2007 as the minimumstate income taxes that we previously were subject to no longer apply due tostate legislative changes. For the three months ended June 30, 2006, werecorded an income tax provision of $20 thousand related to these minimum stateincome taxes.

As a result of thenet revenues and expenses described above, we generated a net loss of $6.9million ($0.26 per basic and diluted share) in the three months ended June 30, 2007,compared to a net loss of $7.2 million ($0.47 per basic and diluted share) inthe three months ended June30, 2006.

**Six months ended June 30,2007 and 2006**

Our net revenue increased 53% to $11.3 million in the six months ended June 30, 2007 compared to $7.4 million in the six months endedJune 30, 2006. Net revenue consists of research anddevelopment efforts we perform under our various collaboration agreements, aswell as our earning of milestones, success fees and license revenue if and asour discoveries progress through our collaborators’ development processes. Netrevenue for the six months ended June 30, 2007 and 2006 is summarized as follows (in thousands):
|                                               | ** ** | **For the six months ended June 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                                            | ** ** | **2006** | ** ** |
|                                          |       |                                                                |       |   |   |
| Collaborative  research revenue               |       | $                                                                   | 7,838      |   | $ | 6,158 |   |
| Milestones,  success fees and license revenue |       | 3,468                                                               |       | 1,250 |   |
|                                          |       | $                                                                   | 11,306     |   | $ | 7,408 |   |

 

Cephalon accounted for 22% and 6% of our net revenue in the six monthsended June 30, 2007 and 2006, respectively. Our alliance with Cephalon commenced in May 2006.  Wyeth accounted for 21% of our net revenue inthe six months ended June 30, 2007.  Ouralliance with Wyeth commenced in January 2007 and therefore there was nocorresponding revenue in the six months ended June 30, 2006.  Organon accounted for 12% and 23% of our netrevenue in the six months ended June 30, 2007 and 2006, respectively.  Schering-Plough accounted for 25% and 45% ofour net revenue in the six months ended June 30, 2007 and 2006, respectively, including $2.0 million of our milestone and success feesrevenue recorded in the six months ended June 30, 2007.

The increase in collaborative research revenue in the six months ended June30, 2007 was largely due to our recent alliances with Cephalon, Wyeth, and GSK,partially offset decreased research revenue that resulted from the completionof our research activities under our collaborations with Schering-Plough inApril 2007.

The increase in milestones, success fees and license revenue relates to$3.0 million in milestone revenue earned in the six months ended June 30, 2007($2.0 million from our Schering-Plough collaborations and $1.0 million from ourcollaboration with Biovitrum), compared to the achievement of $1.0 millionmilestone revenue earned in the six months ended June 30, 2006 (from ourSchering-Plough collaborations).

Collaborativeresearch and development expense includes the labor, material, equipment andallocated facilities cost of our scientific staff that is working oncollaborative partnerships. Collaborative research and development expensesincreased 73% to $10.9 million in the six months ended June 30, 2007compared to $6.3 million in the six months ended June 30, 2006. This increase relates to an increasein resources allocated to our recent alliances with GSK, Cephalon and Wyeth. InDecember 2006, we entered into the Wyeth agreement under which we licensedcertain rights to our JAK3 program to 

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Wyeth. Prior to January2007, the resources that were deployed on the JAK3 program were accounted forin proprietary research and development expense. Resources deployed on our JAK3program, as they relate to programs for employing topical administration forocular and dermatological diseases, have been and will continue to be accountedfor in proprietary research and development as we retain all rights to theseprograms. This increase was offset by decreasedresources allocated to our collaborations with Schering-Plough that resultedfrom the completion of our research activities in April 2007.Share-based compensation costs associated with our adoption of SFAS 123R forthe six months ended June 30, 2007 and 2006 were $263 thousand and $158thousand, respectively.

Proprietaryresearch and development expense includes research and development acquisitioncosts, labor, material, equipment and allocated facilities cost of scientificstaff working on self-funded internal drug discovery and development programs. Our mostadvanced internal program is our DARA program, which is in Phase 1 clinicaltrials. We licensed our DARA program from BMS in March 2006. In addition, wecurrently have several internal programs in advanced preclinical discovery.Proprietary research and development expenses increased 6% to $12.5 million inthe six months ended June 30, 2007 compared to $11.8 million in the six monthsended June 30, 2006.****Proprietaryresearch and development expense for the six months ended June 30, 2006included a $2.0 million charge relating to acquisition costs of the DARAprogram from BMS. Exclusive of this charge, the increase for the six monthsended June 30, 2007 over the six months ended June 30, 2006 was 28%, or $2.7million**.****Thisincrease was primarily attributable to costs relating to the Phase 1 clinicaltrials for PS433540, including a $1.0 million milestone payment to BMS, andcosts expended on our CCR1 discovery program. The increase was offset by adecrease in costs related to our JAK3 program. As previously mentioned, certainaspects of our JAK3 program were partnered with Wyeth in December 2006. Themajority of the costs related to this program, previously incurred inproprietary research and development expense in prior periods, are nowcategorized as collaborative research and development.  Share-based compensation costs associatedwith our adoption of SFAS 123R for the six months ended June 30, 2007 and 2006were $149 thousand and $185 thousand, respectively. Because of the speculativenature of these internal drug discovery and development projects, it is notpossible to estimate completion dates or costs of completion. Additionally,from time to time, certain staff and other research and development resourcesmay be temporarily redirected from one project to another, which redirectionmay also delay or impact the cost of internal drug discovery and developmentprojects.

General andadministrative expense increased by 12% to $5.5 million in the six months endedJune 30,2007 compared to $4.9 million in the six months ended June 30,2006.  The increase in general and administrative expense is attributableto increased consulting and share-based compensation costs during the sixmonths ended June 30, 2007.  Share-basedcompensation costs associated with our adoption of SFAS 123R for the six monthsended June 30, 2007 and 2006 were $604 thousand and $462 thousand,respectively.

Interest and otherincome, net increased to $1.6 million in the six months ended June 30, 2007compared to $614 thousand in the six months ended June 30, 2006.  This increase is primarily dueto higher yields on our increased cash, cash equivalents, and marketablesecurities balances during the six months ended June 30, 2007 as compared tothe six months ended June 30, 2006.

The expenseassociated with the increase in warrant liability represents the change in thefair value of the warrants that were issued in connection with our equityfinancing in October 2006, from December 31, 2006 to June 30, 2007. The fairvalue of the warrants is determined using the Black-Scholes option-pricingmodel and is remeasured at each reporting period (quarterly).

Increase in taxbenefit represents an adjustment to our estimated provision, to reflect actualminimum taxes due.  We recorded no incometax provision for the six months ended June 30, 2007 as the minimum state income taxes thatwe previously were subject to no longer apply due to state legislative changes.For the six months ended June 30, 2006, we recorded an income tax provision of$20 thousand related to these minimum state income taxes.

As a result of thenet revenues and expenses described above, we generated a net loss of $16.9million ($0.63 per basic and diluted share) in the six months ended June 30, 2007,compared to a net loss of $14.9 million ($0.98 per basic and diluted share) inthe six months ended June30, 2006.

**Contractual Obligations**

For a discussionof our contractual obligations, see “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in our report onForm 10-K for the year ended December 31, 2006. See discussion of theCollaboration and License Agreement with Organon in Note 2, as well as thecommitments and contingencies in Note 9, respectively to the unauditedconsolidated financial statements contained herein for new contractualobligations as of June 30, 2007.

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**Net Loss Outlook**

We have had net losses in recent years and we expect to incur losses infuture periods. These losses are expected to increase as compared to priorperiods as a result of the increased level of investment we plan to make in ourinternal proprietary programs in the future. Our internal proprietary researchand development costs are expected to continue to increase due to our effortsto progress the DARA program, specifically our product candidate PS433540,through clinical trials.

Ournet loss is highly dependent on the continued funding and success of ourresearch and development programs with our existing collaborators. Ourcollaborations with Schering-Plough ceased in April 2007.  We will continue to be entitled to paymentsresulting from the successful achievement by Schering-Plough, if any, ofpreclinical and clinical milestones as well as royalty payments from sales, ifany, of products resulting from compounds already delivered by us and acceptedby Schering-Plough under the collaborations.

Our adoption ofSFAS 123R, which was effective January 1, 2006, increased our compensationcosts and will continue to have a significant impact on our results ofoperations.  Changes in the fair value ofthe warrants we issued in October 2006 are reported in the statements ofoperations as income or expense. As such, changes to the market price of ourcommon stock or to the assumptions used in calculating the fair value of thewarrants may cause significant increases or decreases to our results ofoperations. However, neither the impact of share-based compensation costs, northe impact of changes in the fair value of the warrant liability will have animpact on our cash flows.

There is no assurance that we will ever achieve profitable operations, orthat profitable operations, if achieved, could be sustained on a continuingbasis.

**Critical Accounting Policies and Estimates**

The preparation of ourfinancial statements and disclosures involve the use of judgments andestimates.  We believe the followingcritical accounting policies which we follow involve significant judgments anduse estimates.

*Revenue Recognition*

Contract revenue isgenerally recognized either (i) on a proportional performance basis, forcontracts specifying payment for services over a given period, or (ii) asservices are performed under the agreement for contracts specifying payment ona full-time employee basis.

Revenue earned related toup-front product and technology license fees is recognized in accordance withStaff Accounting Bulletin 104 issued by the SEC and EITF Issue 00-21, “RevenueArrangements with Multiple Deliverables” issued by the FASB. Accordingly,amounts received under multiple-element arrangements requiring ongoing servicesor performance by us are recognized over the period of such services orperformance.

Revenue from milestonesis recognized when earned, as evidenced by written acknowledgement from thecollaborator, provided that (i) the milestone event is substantive, itsachievability was not reasonably assured at the inception of the agreement, andwe have no further performance obligations relating to that event, and (ii) collectibilityis reasonably assured.  If these criteriaare not met, the milestone payment is recognized over the remaining period ofour performance obligations under the arrangement.  Royalties are recognized as earned inaccordance with the terms of various research and collaboration agreements.

*Share-basedCompensation*

Effective January 1,2006, we adopted the fair value recognition provisions of SFAS 123R, using themodified-prospective transition method. This statement is a revision to SFAS123, supersedes APB 25 and amends SFAS No. 95, “Statement of Cash Flows.”  Under this transition method, compensationcost recognized includes compensation costs for all share-based paymentsgranted prior to, but not yet vested as of December 31, 2005 based on the grantdate fair value estimated in accordance with the original provisions of SFAS123, and compensation cost for all share-based payments 

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granted subsequent toDecember 31, 2005 based on the grant date fair value estimated in accordancewith provisions of SFAS 123R.

Under SFAS 123R, we usethe Black-Scholes option pricing model to estimate the fair value of theshare-based awards as of the grant date. The Black-Scholes model, by itsdesign, is highly complex and dependent upon key data inputs estimated by management.The primary data inputs with the greatest degree of judgment are the estimatedlives of the share-based awards and the estimated volatility of our stockprice. The Black-Scholes model is sensitive to changes in these two datainputs. Beginning in fiscal year 2006, we calculated the estimated life ofstock options granted using a “simplified” method, which is based on theaverage of the vesting term and the actual term of the option, as a result ofguidance from the SEC as contained in Staff Accounting Bulletin No. 107permitting the initial use of this method through 2007. Typically, expectedstock price volatility is based on the daily historical trading data from anappropriate point in time through the last day of the applicable period. Becauseour historical trading data only dates back to May 3, 2004, the date of ourspin-off from Accelrys, we determine our expected volatility using an analysisof the stock price volatility of companies comparable to ours in our industry.

*WarrantLiability*

We follow EITF00-19 in accounting for our warrants, which provides guidance fordistinguishing between permanent equity, temporary equity and assets andliabilities. Under EITF 00-19, to qualify as permanent equity, an equityderivative, including warrants, must permit us to settle in unregisteredshares. Under securities law, if the warrants were issued in connection with apublic offering and have a cash settlement feature at the holder’s option, acompany does not have the ability to settle in unregistered shares. Therefore,the warrants cannot be classified as permanent equity and are insteadclassified as a liability. The approximately 1,450,000 warrants that we issuedas part of our equity financing in October 2006 meet this criteria, and theirfair value has been recorded as a liability in the accompanying balancesheets.  Other warrants we had previouslyissued qualify as permanent equity and do not require remeasurement.

We record ourwarrant liabilities at fair value using a Black-Scholes option-pricing modeland remeasure at each reporting date until the warrants are exercised or haveexpired. Changes in the fair value of the warrants are reported in thestatements of operations as income or expense. The fair value of the warrantscould be subject to significant fluctuation based on changes in our stockprice, expected volatility, expected life, the risk-free interest rate anddividend yield. The market price for our common stock has been and may continueto be volatile. Consequently, future fluctuations in the price of our commonstock may cause significant increases or decreases in the fair value of thewarrants issued in October 2006.

*Long-Lived Assets*

We review long-livedassets, including leasehold improvements, property and equipment, and acquiredtechnology rights, for impairment whenever events or changes in businesscircumstances indicate that the carrying amount of the assets may not be fullyrecoverable.  This requires us toestimate future cash flows related to these assets.  Actual results could differ from theseestimates, which may affect the carrying amount of assets and the actualamortization expense.  As of June 30,2007, we had long-lived assets with a net book value of $11.9 million.

*Accounting for Uncertain Tax Positions*

In June 2006, the FASBissued Interpretation No. 48, “Accounting for Uncertainty in Tax Positions – anInterpretation of FASB Statement No. 109” (FIN 48).  FIN 48 appliesto all open tax positions accounted for in accordance with SFAS No. 109, “Accountingfor Income Taxes” and is intended to result in increased relevance andcomparability in financial reporting of income taxes and to provide moreinformation about the uncertainty in income tax assets and liabilities. Weadopted FIN 48, effective January 1, 2007, and have concluded that we have nosignificant open tax positions as of June 30, 2007, and thus, such adoption hadno impact on our income tax assets and liabilities.

**NewAccounting Pronouncements**

*Fair Value Measurements*

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements,” (SFAS 157). SFAS 157establishes a framework for measuring fair value in accordance with generallyaccepted accounting principles and expands disclosures about fair valuemeasurements. SFAS 157 is effective for fiscal years beginning after November15, 2007, and interim periods within those fiscal years. We are currentlyevaluating the impact of SFAS No. 157 on our financial position and results ofoperations.

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**Item 3. Quantitative and Qualitative Disclosures about Market Risk**

Our international salesgenerally are denominated in United States Dollars, and are, therefore, notexposed to changes in foreign currency exchange rates.

We do not use derivativefinancial instruments for trading or speculative purposes. However, we regularlyinvest excess cash in overnight repurchase agreements that are subject tochanges in short-term interest rates. We believe that the market risk arisingfrom holding these financial instruments is minimal.

Our exposure to marketrisks associated with changes in interest rates relates primarily to theincrease or decrease in the amount of interest income earned on our investmentportfolio since we have minimal debt. We ensure the safety and preservation ofinvested funds by limiting default risks, market risk and reinvestment risk. Wemitigate default risk by investing in investment grade securities. Ahypothetical 100 basis point adverse move in interest rates along the entireinterest rate yield curve would not have materially affected the fair value ofour interest sensitive financial instruments as of June 30, 2007.

**Item4. Controls and Procedures**

For the threemonths ended June30, 2007, our management carried out an evaluation, under thesupervision and with the participation of our President and Chief ExecutiveOfficer and our Executive Vice President, Chief Financial Officer and Treasurer(our principal financial officer and chief accounting officer), of theeffectiveness of our disclosure controls and procedures pursuant toRules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, or theExchange Act, as of the end of the period covered by this report. Based uponthis evaluation, our President and Chief Executive Officer and our ExecutiveVice President, Chief Financial Officer and Treasurer concluded that as of June 30, 2007, ourdisclosure controls and procedures were effective to ensure that theinformation required to be disclosed by us in reports filed under the ExchangeAct was recorded, processed, summarized and reported within the time periodsspecified in the rules and forms of the SEC. Our management, including ourPresident and Chief Executive Officer and our Executive Vice President, ChiefFinancial Officer and Treasurer, does not expect that our disclosure controlsor our internal controls will prevent all errors and all fraud. A controlsystem, no matter how well designed and operated, cannot provide assurance thatthe objectives of the control system are met, and no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within a company have been detected.

Additionally, ourPresident and Chief Executive Officer and our Executive Vice President, ChiefFinancial Officer and Treasurer determined that there were no changes in ourinternal control over financial reporting during the three month period ended June 30, 2007, thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

**PART II. OTHER INFORMATION**

**Item 1.****                ****Legal Proceedings**

We are not currently aparty to any legal proceedings the negative outcome of which would have amaterial adverse effect on our business, financial condition or results ofoperations.

**Item 1A.****        RiskFactors**

Our performance andfinancial results are subject to risks and uncertainties, including, but notlimited to, the specific risks disclosed in Item 1A. Risk Factors in our AnnualReport on Form 10-K for the year ended December 31, 2006. Except as notedbelow, there have been no material changes to the risk factors disclosed in theForm 10-K.

**RISKSRELATED TO OUR BUSINESS AND INDUSTRY**

***If we consume cash more quickly than expected, and if we areunable to raise additional capital, we may be forced to curtail operations.***

As of June 30,2007, we had cash, cash equivalents and marketable securities aggregating $92.7million. Also as of June 30, 2007, we had deferred revenue and otherliabilities of approximately $41.6 million relating to research and developmentactivities that are to be provided by us subsequent to June 30, 2007. Weanticipate that our capital resources on hand as of 

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June 30, 2007 will beadequate to fund our operations at their current levels at least throughDecember 31, 2008.  However, changes mayoccur that would cause us to consume available capital resources before thattime. Examples of relevant potential changes that could impact our capitalresources include:

·      the costs associated withour drug research and development activities, including the costs associatedwith our Phase 1 and Phase 2 clinical development programs (including ourplanned Phase 2 clinical trials) for our product candidate PS433540 andadditional costs we may incur if our development programs are delayed or aremore expensive to implement than we currently anticipate;

·      changes in existingcollaborative relationships, including the funding we receive in connectionwith those relationships;

·      the progress of ourmilestone and royalty producing activities;

·      acquisitions of otherbusinesses or technologies;

·      the purchase of additionalcapital equipment and construction of additional laboratory space;

·      cash refunds we may berequired to make to GSK if, prior to March 24, 2011, we exercise ourdiscretionary termination right under the GSK Agreement;

·      cash payments we may berequired to make to BMS if we fail to deliver certain compound libraries underthe BMS Agreement;

·      cash payments we may berequired to make to Organon relating to a termination fee if, prior to August2010, we exercise our discretionary termination right under the OrganonAgreement;

·      penalties we may be requiredto pay certain institutional investors that participated in the privateplacement transaction we closed in August 2005 if we fail to comply withcertain covenants and obligations related to that transaction;

·      competing technological andmarket developments; and

·      the cost of filing,prosecuting, defending and enforcing patent claims and other intellectualproperty rights, and the outcome of related litigation.

In May 2007, weraised capital through a public underwritten offering of common stock. Ourissuance of approximately 8.1 million shares of common stock in connection withthis financing resulted in significant dilution in the percentage ownership ofour stockholders that owned stock prior to the financing. It is likely that wewill raise capital in the future. The capital could be raised through public orprivate financings involving debt or common stock or other classes of ourequity. Further issuances of equity securities will further dilute ourstockholders’ percentage ownership.  Asof June 30, 2007, there were approximately 3,932,000 stock options outstandinggranted under our various equity compensation plans, and approximately1,626,000 warrants outstanding, which includes approximately 176,000 warrantsissued in connection with the GSK Agreement and approximately 1,450,000warrants issued in connection with our October 2006 financing transaction.These equity instruments represent approximately 19% of our shares outstandingat June 30, 2007. The significant dilution represented by our outstandingwarrants and equity compensation awards may make it more difficult for us toraise additional capital. Additional capital may not be available on favorableterms, or at all. If adequate funds are not available, we may be required tocurtail operations significantly or to obtain funds by entering intoarrangements with collaborative partners or others that may require us torelinquish rights to certain of our technologies, products or potential marketsthat we would not otherwise relinquish.

***Because PS433540 is in Phase 1 clinical development, thereis a high risk that further development and testing will demonstrate that thecompound is not suitable for commercialization. In addition, because we exclusively licensed PS433540 from BMS, anydispute with BMS may adversely affect our ability to develop and commercializePS433540.***

We have noproducts that have received regulatory approval for commercial sale.  PS433540 is in Phase 1 clinical development,and we face the substantial risks of failure inherent in developing drugs basedon new technologies.

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PS433540 mustsatisfy rigorous standards of safety and efficacy before the FDA and foreignregulatory authorities will approve it for commercial use.  Phase 1 clinical trials with PS433540 may notdemonstrate that the product candidate is sufficiently safe to warrant ourcontinued development of it, and Phase 2 clinical trials, if any, with PS433540may not demonstrate that it is efficacious with respect to the clinicalindications for which we seek to develop it. We will need to conduct significant additional clinical trials todemonstrate the safety and efficacy of PS433540 to the satisfaction of the FDAand foreign regulatory authorities to obtain product approval.

Clinicaldevelopment is a long, expensive and uncertain process.  It may take us many years to completeclinical trials, and failure can occur at any stage of trials.  Success in preclinical testing and earlyclinical trials does not ensure that later clinical trials will besuccessful.  We may suffer significantsetbacks in advanced clinical trials, even after promising results in earliertrials.  We may not be able to enroll asufficient number of patients to complete our clinical trials in a timelymanner.  Based on results at any stage ofpreclinical testing or clinical trials, we may decide to discontinuedevelopment of PS433540.

We do not knowwhether any future clinical trials of PS433540 will demonstrate sufficientsafety and efficacy necessary to obtain the requisite regulatory approvals orwill result in marketable products.  Ourfailure to adequately demonstrate the safety and efficacy of PS433540 in thedevelopment program will prevent receipt of FDA and foreign regulatoryapprovals and, ultimately, its commercialization.

If there is anydispute between us and BMS regarding our rights under the BMS Agreement, ourability to develop and commercialize PS433540 may be adversely affected.  Any loss of our rights from BMS could delayor completely terminate our product development efforts for PS433540 and othercompounds licensed from BMS.

***We had net losses in recent years and our futureprofitability is uncertain.***

During the sixmonths ended June 30, 2007, we had a net loss of approximately $16.9million.  The net loss was primarily due to costs incurred in our internalproduct development efforts, including the costs of developing our DARA programand the research and development of our other product candidates.

We expect to incur losses in future periods and these losses are expectedto increase as compared to prior periods as a result of the increased level ofinvestment we plan to make in our internal proprietary programs in the future.

Our adoption ofSFAS 123R, which was effective January 1, 2006, increased our compensationcosts and will continue to have a significant impact on our results ofoperations. In addition, under EITF 00-19, the accounting treatment of thewarrants that we issued in our October 2006 equity financing may have asignificant impact on our results of operations, depending on the volatility ofthe market price of our common stock and the assumptions used in calculatingthe fair value of the warrants.

On a quarterlybasis, our future operating results are likely to be highly volatile dependingupon our receipt of milestone payments from our collaborators. We may notreceive milestone payments on a regular basis or at all. Our ability to achieveprofitability, if ever, will be significantly impacted by the level ofinvestment we plan to make in our internal proprietary programs in the future,as well as the results of those programs.

Continuing net losses maylimit our ability to fund our operations and we may not generate income fromoperations in the future.

**Item 2.****     ****Unregistered Sales of EquitySecurities and Use of Proceeds**

**None.**

**Item 3.**      **Defaults upon Senior Securities**

None.

**Item 4.****     ****Submission of Matters to aVote of Security Holders.**

On May 3, 2007, we held our AnnualMeeting of Stockholders in Cranbury, New Jersey.  The following matterswere submitted to a vote of security holders.

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Our stockholders voted to elect thefollowing Class III members of our Board of Directors for terms of three yearseach:
|                          | ** ** | ** **         | ** ** | **Votes ** | ** ** |
|--------------------------|------------|--------------------|------------|-----------------|------------|
| **Nominee**              | ** ** | **Votes For** | ** ** | **Withheld**    | ** ** |
| Steven J. Burakoff, M.D. |       | 19,534,376         |       | 184,530         |       |
| Bruce A. Peacock         |       | 19,287,991         |       | 430,915         |       |
| Martin H. Soeters        |       | 19,351,503         |       | 367,403         |       |

 

Our stockholders also voted to electDennis H. Langer, M.D., J.D. as a Class I member of our Board of Directors toserve until our 2008 annual meeting of stockholders.  19,345,058 votes were cast in favor of Dr.Langer’s election and 373,848 votes were withheld with respect to his election.

Our directors whose terms of officecontinued after the meeting include two Class I directors whose termexpires in 2008, Frank Baldino, Jr., Ph.D. and Leslie J. Browne, Ph.D., andthree Class II directors whose term expires in 2009, Carol A. Ammon, Paul A.Bartlett, Ph.D. and Joseph A. Mollica, Ph.D.

Our stockholders voted as follows toratify the appointment of Ernst & Young LLP as our independentexternal auditors for the fiscal year ending December 31, 2007: 19,694,094shares were voted in favor of ratification, 20,823 shares were voted againstratification, and 3,987 shares abstained from voting.

Our stockholders voted as follows to amendour Certificate of Incorporation to change our name from “Pharmacopeia DrugDiscovery, Inc.” to “Pharmacopeia, Inc.”: 19,686,904 shares were voted in favorof the amendment, 28,426 shares were voted against the amendment, and 3,573shares abstained from voting.

Our stockholders voted as follows toapprove the Amended and Restated 2004 Stock Incentive Plan (the “Plan”) whichincreased the number of shares available for issuance there under and revisedthe plan in light of section 409A of the Internal Revenue Code of 1986:12,882,131 shares were voted in favor of the Plan, 1,883,311 shares were votesagainst the Plan, 16,484 shares abstained from voting, and 4,936,979 shareswere broker non-votes.

**Item 5.****     ****Other Information**

None.

**Item 6.****     ****Exhibits**
| Exhibits. | ** ** | ** **                                                                                                                                                                                                                                                                     |
|-----------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |       |                                                                                                                                                                                                                                                                           |
| 10.1      |       | Master Security  Agreement dated as of December 26, 2006 between Oxford Finance Corporation  and Pharmacopeia, Inc. (1)                                                                                                                                                        |
|      |       |                                                                                                                                                                                                                                                                           |
| 31.1      |       | Certification of  the Principal Executive Officer of Pharmacopeia, Inc. pursuant to  Rule 13a-l4(a) of the Securities Exchange Act of 1934, as amended, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1)                               |
|      |       |                                                                                                                                                                                                                                                                           |
| 31.2      |       | Certification of  the Principal Financial Officer and Chief Accounting Officer of  Pharmacopeia, Inc. pursuant to Rule 13a-14(a) of the Securities  Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.(1) |
|      |       |                                                                                                                                                                                                                                                                           |
| 32.1      |       | Certification of  the Principal Executive Officer of Pharmacopeia, Inc. pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.(1)                                                                          |
|      |       |                                                                                                                                                                                                                                                                           |
| 32.2      |       | Certification of  the Principal Financial Officer and Chief Accounting Officer of  Pharmacopeia, Inc. pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)                                             |

 

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(1)    Filed herewith.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                                 |   | PHARMACOPEIA, INC.                     |
|---------------------------------|--------|----------------------------------------|
|                            |   |                                   |
| Date:  August 2, 2007 | By:    | /s/ Leslie J. Browne, Ph.D.            |   |
|                            |   | Leslie J. Browne, Ph.D.                |
|                            |   | President, Chief Executive Officer     |
|                            |   | and Director                           |
|                            |   | (Principal Executive Officer)          |
|                            |   |                                   |
|                            | By:    | /s/ Brian M. Posner                    |   |
|                            |   | Brian M. Posner                        |
|                            |   | Executive Vice President,              |
|                            |   | Chief Financial Officer and Treasurer  |
|                            |   | (Principal Financial Officer and Chief |
|                            |   | Accounting Officer)                    |

 

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**PHARMACOPEIA, INC.**

**INDEX TOEXHIBITS**
| Exhibits. | ** ** | ** **                                                                                                                                                                                                                                                                    |
|-----------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |       |                                                                                                                                                                                                                                                                          |
| 10.1      |       | Master Security Agreement dated as of December 26,  2006 between Oxford Finance Corporation and Pharmacopeia, Inc. (1)                                                                                                                                                        |
|      |       |                                                                                                                                                                                                                                                                          |
| 31.1      |       | Certification of the Principal Executive Officer of  Pharmacopeia, Inc. pursuant to Rule 13a-14(a) of the Securities  Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.(1)                              |
|      |       |                                                                                                                                                                                                                                                                          |
| 31.2      |       | Certification of the Principal Financial Officer and  Chief Accounting Officer of Pharmacopeia, Inc. pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1) |
|      |       |                                                                                                                                                                                                                                                                          |
| 32.1      |       | Certification of the Principal Executive Officer of  Pharmacopeia, Inc. pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)                                                                          |
|      |       |                                                                                                                                                                                                                                                                          |
| 32.2      |       | Certification of the Principal Financial Officer and  Chief Accounting Officer of Pharmacopeia, Inc. pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.(1)                                            |

 

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(1)    Filed herewith.

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