**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

| **x**                                                   | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                                    |       |                                                                                                     |
| **For the quarterly period ended  March 31, 2008** |
|                                                    |       |                                                                                                     |
| **Or**                                                  |
|                                                    |       |                                                                                                     |
| **o**                                                   | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**CommissionFile Number: 0-50523**

 

**PHARMACOPEIA, INC.**

(Exact name of registrant asspecified 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’s telephone number,including area code)

 

 

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

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or such shorter periodthat the registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90days.    Yes x     No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

| Large  accelerated filer o                     |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                              |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes o    No x

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date:

 

| **Class**                     | ** ** | **Outstanding  at May 2, 2008** |
|-------------------------------|------------|--------------------------------------|
| Common Stock, $0.01 par value |       | 29,688,923                           |

 

 

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**PHARMACOPEIA,INC.**

 

**Form 10-Q**

 

**Tableof Contents**

 
| **Item**          | ** **                                                                                  | ** **                                                                                     |
|-------------------|---------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|
|              |                                                                                        |                                                                                           |
| PART I.      | FINANCIAL INFORMATION                                                                       | 3                                                                                              |
|              |                                                                                        |                                                                                           |
| Item 1.           | Consolidated Financial Statements (Unaudited):                                              | 3                                                                                              |
|              |                                                                                        |                                                                                           |
|              |                                                                                        | Consolidated Balance Sheets as of  March 31, 2008 and December 31, 2007              | 3 |
|              |                                                                                        |                                                                                           |   |
|              |                                                                                        | Consolidated Statements of Operations for  the Three Months Ended March 31, 2008 and 2007 | 4 |
|              |                                                                                        |                                                                                           |   |
|              |                                                                                        | Consolidated Statements of Cash Flows for  the Three Months Ended March 31, 2008 and 2007 | 5 |
|              |                                                                                        |                                                                                           |   |
|              |                                                                                        | Notes to Unaudited Consolidated Financial  Statements                                          | 6 |
|              |                                                                                        |                                                                                           |
| Item 2.           | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 18                                                                                             |
|              |                                                                                        |                                                                                           |
| Item 3.           | Quantitative and Qualitative Disclosures  about Market Risk                                 | 29                                                                                             |
|              |                                                                                        |                                                                                           |
| Item 4.           | Controls and Procedures                                                                     | 29                                                                                             |
|              |                                                                                        |                                                                                           |
| PART II.     | OTHER INFORMATION                                                                           | 30                                                                                             |
|              |                                                                                        |                                                                                           |
| Item 1.           | Legal Proceedings                                                                           | 30                                                                                             |
|              |                                                                                        |                                                                                           |
| Item 1A.          | Risk Factors                                                                                | 30                                                                                             |
|              |                                                                                        |                                                                                           |
| Item 2.           | Unregistered Sales of Equity Securities and  Use of Proceeds                                | 33                                                                                             |
|              |                                                                                        |                                                                                           |
| Item 3.           | Defaults upon Senior Securities                                                             | 33                                                                                             |
|              |                                                                                        |                                                                                           |
| Item 4.           | Submission of Matters to a Vote of Security  Holders                                        | 33                                                                                             |
|              |                                                                                        |                                                                                           |
| Item 5.           | Other Information                                                                           | 33                                                                                             |
|              |                                                                                        |                                                                                           |
| Item 6.           | Exhibits                                                                                    | 35                                                                                             |
|              |                                                                                        |                                                                                           |
| Signatures        |                                                                                        | 36                                                                                             |
|              |                                                                                        |                                                                                           |
| Index to Exhibits |                                                                                        | 37                                                                                             |
|                   |                                                                                             |                                                                                                |  |  |  |

 

----

 

**PART I - FINANCIALINFORMATION**

 

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

 

**Pharmacopeia, Inc.**

**Consolidated Balance Sheets**

**(Amounts in thousands, exceptshare and per share data)**

 
| ** **                                                                                                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                          | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                                                          | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                     | ** ** | ** **         | ** ** | ** **            | ** ** |
| Cash and cash equivalents                                                                                                           |       | $                  | 61,465     |                  | $          | 30,186 |   |
| Marketable securities                                                                                                               |       | —             |       | 41,129                |       |
| Prepaid expenses and other current assets                                                                                           |       | 1,568              |       | 2,026                 |       |
| Total current assets                                                                                                                |       | 63,033             |       | 73,341                |       |
|                                                                                                                                |       |               |       |                  |       |
| Property and equipment, net                                                                                                         |       | 14,952             |       | 14,840                |       |
| Deferred compensation plan assets                                                                                                   |       | 1,918              |       | 2,073                 |       |
| Other assets                                                                                                                        |       | 144                |       | 144                   |       |
| Total assets                                                                                                                        |       | $                  | 80,047     |                  | $          | 90,398 |   |
|                                                                                                                                |       |               |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                       |       |               |       |                  |       |
| Current liabilities:                                                                                                                |       |               |       |                  |       |
| Accounts payable                                                                                                                    |       | $                  | 3,217      |                  | $          | 2,871 |   |
| Accrued liabilities                                                                                                                 |       | 7,345              |       | 6,928                 |       |
| Deferred revenue, current portion                                                                                                   |       | 23,263             |       | 22,398                |       |
| Notes payable, current portion                                                                                                      |       | 1,252              |       | 1,069                 |       |
| Warrant liability                                                                                                                   |       | 2,599              |       | 4,205                 |       |
| Total current liabilities                                                                                                           |       | 37,676             |       | 37,471                |       |
|                                                                                                                                |       |               |       |                  |       |
| Deferred revenue, long-term                                                                                                         |       | 25,270             |       | 24,769                |       |
| Deferred compensation plan liabilities                                                                                              |       | 1,918              |       | 2,073                 |       |
| Notes payable, long-term                                                                                                            |       | 3,005              |       | 3,001                 |       |
|                                                                                                                                |       |               |       |                  |       |
| 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, 29,676,296 and 29,630,931 shares issued and outstanding,  respectively |       | 297                |       | 296                   |       |
| Additional paid-in capital                                                                                                          |       | 122,596            |       | 121,785               |       |
| Accumulated deficit                                                                                                                 |       | (110,715           | )          | (98,997               | )          |
| Total stockholders’ equity                                                                                                     |       | 12,178             |       | 23,084                |       |
| Total liabilities and stockholders’ equity                                                                                     |       | $                  | 80,047     |                  | $          | 90,398 |   |

 

See accompanying notes to theseunaudited consolidated financial statements

 

3

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**Pharmacopeia, Inc.**

**ConsolidatedStatements of Operations**

**(Amounts inthousands, except share and per share data)**

 
| ** **                                                   | ** ** | **For the Three Months** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                   | ** ** | **Ended March 31,**           | ** ** |
| ** **                                                   | ** ** | **2008**                                | ** ** | **2007** | ** ** |
| ** **                                                   | ** ** | ** **                              | ** ** | ** ** | ** ** |
| **Revenue**                                                  | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Net revenue                                                  |       | $                                       | 6,204      |   | $ | 6,349 |   |
|                                                         |       |                                    |       |   |   |
| **Operating Expenses**                                       |       |                                    |       |   |   |
| Collaborative research and development  expense              |       | 7,920                                   |       | 5,237 |   |
| Proprietary research and development  expense                |       | 8,764                                   |       | 7,418 |   |
| General and administrative expense                           |       | 3,387                                   |       | 2,688 |   |
| Total operating expenses                                     |       | 20,071                                  |       | 15,343 |   |
| Operating loss                                               |       | (13,867                                 | )          | (8,994 | ) |
| Interest and other income, net                               |       | 643                                     |       | 696 |   |
| Interest and other expense, net                              |       | (100                                    | )          | — |   |
| Decrease (increase) in warrant liability                     |       | 1,606                                   |       | (1,706 | ) |
| Loss before income taxes                                     |       | (11,718                                 | )          | (10,004 | ) |
| Provision for income taxes                                   |       | —                                  |       | — |   |
| Net loss                                                     |       | $                                       | (11,718    | ) | $ | (10,004 | ) |
|                                                         |       |                                    |       |   |   |
| Net loss per share:                                          |       |                                    |       |   |   |
| - Basic and diluted                                          |       | $                                       | (0.40      | ) | $ | (0.50 | ) |
|                                                         |       |                                    |       |   |   |
| Weighted average number of common stock  shares outstanding: |       |                                    |       |   |   |
| - Basic and diluted                                          |       | 29,642,134                              |       | 20,134,514 |   |

 

See accompanying notes to theseunaudited consolidated financial statements

 

4

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**Pharmacopeia, Inc.**

**ConsolidatedStatements of Cash Flows**

**(Amounts in thousands)**

 
| ** **                                                                      | ** ** | **For the Three Months** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                      | ** ** | **Ended March 31,**           | ** ** |
| ** **                                                                      | ** ** | **2008**                                | ** ** | **2007** | ** ** |
| ** **                                                                      | ** ** | ** **                              | ** ** | ** ** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                           | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Net loss                                                                        |       | $                                       | (11,718    | ) | $ | (10,004 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities |       |                                    |       |   |   |
| Depreciation and amortization                                                   |       | 728                                     |       | 506 |   |
| Change in warrant liability                                                     |       | (1,606                                  | )          | 1,706 |   |
| Contribution of stock to 401(k) Plan                                       |       | 169                                     |       | 126 |   |
| Share-based compensation                                                        |       | 639                                     |       | 513 |   |
| Changes in assets and liabilities:                                              |       |                                    |       |   |   |
| Accounts receivable                                                             |       | —                                  |       | 5,006 |   |
| Prepaid expenses and other current assets                                       |       | 837                                     |       | 395 |   |
| Accounts payable                                                                |       | 346                                     |       | 1,132 |   |
| Accrued and other liabilities                                                   |       | 417                                     |       | 685 |   |
| Deferred revenue                                                                |       | 1,366                                   |       | 13,400 |   |
| Net cash (used in) provided by operating  activities                            |       | (8,822                                  | )          | 13,465 |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                           |       |                                    |       |   |   |
| Capital expenditures, net                                                       |       | (840                                    | )          | (460 | ) |
| Proceeds from maturities of marketable  securities                              |       | 40,750                                  |       | 2,027 |   |
| Net cash provided by investing activities                                       |       | 39,910                                  |       | 1,567 |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                           |       |                                    |       |   |   |
| Proceeds from issuance of common stock  related to compensation plans           |       | 4                                       |       | 517 |   |
| Proceeds from borrowings under notes  payable                                   |       | 416                                     |       | — |   |
| Repayments under notes payable                                                  |       | (229                                    | )          | — |   |
| Net cash provided by financing activities                                       |       | 191                                     |       | 517 |   |
| Net increase in cash and equivalents                                            |       | 31,279                                  |       | 15,549 |   |
| Cash and equivalents, beginning of period                                       |       | 30,186                                  |       | 43,099 |   |
| Cash and equivalents, end of period                                             |       | $                                       | 61,465     |   | $ | 58,648 |   |

 

See accompanying notes to these unauditedconsolidated financial statements

 

5

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**Pharmacopeia, Inc.**

 

**Notes to Unaudited Consolidated FinancialStatements**

 

**1. Background and Basis of Presentation**

 

Pharmacopeia, Inc. (Pharmacopeia or theCompany) was incorporated in 2002 as Pharmacopeia Drug Discovery, Inc., awholly owned subsidiary of Accelrys, Inc. (Accelrys). On April 30,2004 (the distribution date), Accelrys spun-off 100 percent of the sharesof Pharmacopeia Drug Discovery, Inc. in a pro rata tax-free distributionand distributed to its stockholders of record one share of Pharmacopeia DrugDiscovery, Inc. common stock for every two shares of Accelrys common stockheld. Effective May 3, 2007, Pharmacopeia Drug Discovery, Inc.changed its name to Pharmacopeia, Inc.

 

Pharmacopeia is a clinical development stagebiopharmaceutical company dedicated to discovering and developing novel smallmolecule therapeutics to address significant medical needs. The Company’sstrategy is to retain product candidates at least to clinical validation, andto continue development on its own to New Drug Application (NDA) filing andcommercialization for selected indications. The Company has a broad portfolioof clinical and preclinical candidates under development internally or bypartners.

 

The consolidated financial statements includethe accounts of the Company and its wholly-owned subsidiary Pharmacopeia UKHoldings Limited (Pharmacopeia UK), which was formed in March 2007. Allsignificant intercompany accounts and transactions have been eliminated inconsolidation.

 

The accompanying unaudited consolidated financial statements have beenprepared in accordance with U. S. generally accepted accounting principles forinterim financial information and with instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, these unaudited consolidatedfinancial statements do not include all of the information and disclosuresrequired by U. S. generally accepted accounting principles for completeconsolidated financial statements. In the opinion of management, alladjustments (of a normal recurring nature) considered necessary for a fairpresentation of the consolidated financial statements have been included.Interim results are not necessarily indicative of the results that may beexpected 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, 2007.

 

**2. Significant Accounting Policies**

 

**Use of Estimates**

 

The preparation of financial statements inconformity with U.S generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets, liabilities, revenues and expenses, and the disclosure of contingentassets and liabilities. Actual future results could differ from thoseestimates.

 

**Revenue Recognition**

 

Contract revenue is generally recognizedeither (i) on a proportional performance basis, for contracts specifyingpayment for services over a given period, or (ii) as services areperformed under the agreement for contracts specifying payment on a full-timeemployee basis.

 

Revenue earned related to up-front productand technology license fees is recognized in accordance with Staff AccountingBulletin (SAB) 104 issued by the Securities and Exchange Commission (SEC) andEmerging Issue Task Force (EITF) No. 00-21, “Revenue Arrangements withMultiple Deliverables” (EITF 00-21) issued by the Financial AccountingStandards Board (FASB). Accordingly, amounts received under multiple-elementarrangements requiring ongoing services or performance by us are recognizedover the period of such services or performance.

 

Revenue from milestones is recognized whenearned, as evidenced by written acknowledgement from the collaborator, providedthat (i) the milestone event is substantive, its achievability was notreasonably assured at the inception of the agreement, and the Company has nofurther performance obligations relating to that event, and (ii) collectibilityis reasonably assured. If these criteria are not met, the milestone payment isrecognized over the remaining period of our performance obligations under thearrangement. Royalties are recognized as earned in accordance with the terms ofvarious research and collaboration agreements.

 

**Share-based Compensation**

 

Effective January 1, 2006, the Companyadopted the fair value recognition provisions of SFAS No. 123(revised 2004) “Share-Based Payments” (SFAS 123R), using themodified-prospective transition method. This statement is a revision toSFAS 123, supersedes Accounting Principles Board Opinion No. 25 “Accountingfor Stock Issued to Employees” (APB 25) and amends SFAS No. 95, “Statementof Cash Flows.” Under this transition method, compensation cost recognizedincludes compensation costs for all share-based payments granted prior to, butnot yet vested as of December 31, 2005 based on the grant date fair valueestimated in accordance with the original provisions of SFAS 123, andcompensation 

 

6

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cost for all share-based payments granted subsequent to December 31,2005 based on the grant date fair value estimated in accordance with provisionsof SFAS 123R.

 

Under SFAS 123R, the Company uses theBlack-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 bymanagement. The primary data inputs with the greatest degree of judgment arethe estimated lives of the share-based awards and the estimated volatility ofthe Company’s stock price. The Black-Scholes model is sensitive to changes inthese two data inputs. Beginning in fiscal year 2006, the Company calculatedthe estimated life of stock options granted using a “simplified” method, whichis based on the average of the vesting term and the actual term of the option,as a result of guidance from the SEC as contained in SAB 107 permittingthe initial use of this method through 2007. In December 2007, the SECissued SAB 110, which is effective January 1, 2008, expressing theexpectation that companies should be employing information from internal orexternal sources, about employee stock option exercise behavior when developingestimates of expected term, as they relate to stock option valuations.SAB 110 states that the SEC will continue to accept the use of the “simplified”method beyond December 31, 2007 under certain circumstances. The Companyevaluated the exercise behavior of its employees for stock options grantedsince its spin-off from Accelrys, Inc. in April 2004 and determinedthat the exercise history was an inadequate measure of the expected term of itsstock options.  Therefore, the Companyhas continued its use of the simplified method as prescribed in SAB 107.Expected stock price volatility is typically based on the daily historicaltrading data from an appropriate point in time through the last day of theapplicable period. Because the Company’s historical trading data only datesback to May 3, 2004, the first trading date after its spin-off fromAccelrys, the Company has estimated expected volatility for the first quarterof 2008 using an analysis of the stock price volatility of comparable companiesin its industry.

 

**Warrant Liability**

 

The Company, in accounting for its warrants,follows EITF No. 00-19, “Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock” (EITF 00-19)which provides guidance for distinguishing between permanent equity, temporaryequity 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 settlementfeature at the holder’s option, the Company does not have the ability to settlein unregistered shares. Therefore, the warrants cannot be classified aspermanent equity and are instead classified as a liability. The approximately1,450,000 warrants that the Company issued as part of its equity financing in October 2006meet this criteria, and their fair value has been recorded as a liability inthe accompanying balance sheets. Other warrants the Company had previouslyissued qualify as permanent equity and do not require remeasurement.

 

The Company records its warrant liabilitiesat fair value using a Black-Scholes option-pricing model and remeasures at eachreporting date until the warrants are exercised or have expired. Changes in thefair value of the warrants are reported in the statements of operations asincome or expense. The fair value of the warrants is subject to significantfluctuation based on changes in the Company’s stock price, expected volatility,expected life, the risk-free interest rate and dividend yield. The market pricefor the Company’s common stock has been and may continue to be volatile.Consequently, future fluctuations in the price of the Company’s common stockmay cause significant increases or decreases in the fair value of the warrantsissued in October 2006.

 

7

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**Research and Development Expense**

 

Collaborative researchand development expense consists of the labor, material, equipment andallocated facilities cost of the Company’s scientific staff who are workingpursuant to the Company’s collaborative agreements. From time to time,collaborative research and development expense includes costs related toresearch efforts in excess of those required by the terms of certaincollaborative agreements. Management has the discretion to set the scope ofsuch excess efforts and may increase or decrease the level of such effortsdepending on the Company’s strategic priorities.

 

Proprietary research anddevelopment expense consists of intellectual property in-licensing costs,labor, materials, contracted services, and allocated facility costs that areincurred in connection with internally funded drug discovery and developmentprograms.

 

All research anddevelopment costs are charged to operations as incurred.

 

**Impairment of Long-Lived Assets**

 

The Company reviews the recoverability of thecarrying value of long-lived assets, primarily property, plant and equipment,for impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be fully recoverable.

 

Should indicators of impairment exist, thecarrying values of the assets are evaluated in relation to the operatingperformance and future undiscounted cash flows of the underlying business. Thenet book value of an asset is adjusted to fair value if its expected futureundiscounted cash flow is less than its book value. The Company identified nosuch impairment losses during the three months ended March 31, 2008 and2007.

 

**Accounting for Uncertain Tax Positions**

 

The Company adopted the provisions of FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes—aninterpretation of FAS Statement No. 109” (FIN 48). FIN 48 appliesto all uncertain tax positions accounted for in accordance with SFAS No. 109,“Accounting for Income Taxes” and is intended to result in increased relevanceand comparability in financial reporting of income taxes and to provide moreinformation about the uncertainty in income tax assets and liabilities. TheCompany will recognize potential interest and penalties related to income taxpositions as a component of the benefit or provision for income taxes on theconsolidated statements of operations in any future periods in which theCompany must record a liability. Because the Company has not recorded such aliability at March 31, 2008, there is no impact to the Company’s effectivetax rate. The Company does not anticipate that total unrecognized tax benefitswill significantly change during the next twelve months.

 

**Concentrations of Risk**

 

See Note 3 and Note 4 to the FinancialStatements regarding Concentrations of Risk as they relate to the Company’srevenue concentrations.

 

**Net Loss Per Share**

 

The Company computes net loss per share inaccordance with SFAS No. 128, “Earnings Per Share” (SFAS 128). Underthe 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 

 

8

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stockequivalents for outstanding stock options would be anti-dilutive and,therefore, the weighted average shares used to calculate both basic and dilutedearnings per share are the same.

 

**Reclassifications**

 

Certain accounts in the consolidatedstatement of cash flows for the three months ended March 31, 2007 havebeen reclassified for comparative purposes to conform with the presentation ofthe consolidated statement of cash flows for the three months ended March 31,2008.

 

**New Accounting Pronouncements**

 

*Fair Value Measurements*

 

In September 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements,” (SFAS 157). SFAS 157 establishes a framework formeasuring fair value in accordance with generally accepted accountingprinciples and expands disclosures about fair value measurements. Thestatement defines fair value as the exit price that would be received to sellan asset or paid to transfer a liability. Fair value is a market-based measurement that should be determined usingassumptions that market participants would use in pricing an asset orliability.  The statement establishes athree-level hierarchy to prioritize the inputs used in measuring fairvalue.  The levels are described in thetable below with Level 1 having the highest priority and Level 3 having thelowest.

 

In February 2008, the FASB issued FASBStaff Position (FSP) 157-b which delayed the effective date of SFAS 157for one year for all nonfinancial assets and nonfinancial liabilities, exceptthose that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually). SFAS 157 and FSP157-b are effective for financial statements issued for fiscal years beginningafter November 15, 2007. The Company has elected a partial deferral ofStatement 157 under the provisions of FSP 157-b and, effective January 1,2008, the Company adopted SFAS 157 for those assets and liabilities thatare remeasured at fair value on a recurring basis. This partial adoption ofSFAS 157 did not have a material effect on the Company’s consolidated financialstatements as of and for the three months ended March 31, 2008.

 

Thefollowing table provides a summary of the assets and liabilities that aremeasured at fair value on a recurring basis as of March 31, 2008:

 
| ** **                               | ** ** | ** **                   | ** ** | ** ** | **Basis of Fair Value Measurements**                    | ** ** |
|------------------------------------------|------------|------------------------------|------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **As of**               | ** ** | ** ** | **Quoted prices  in active  markets for  identical  assets** | ** ** | ** ** | **Significant  other  observable  inputs** | ** ** | ** ** | **Significant  unobservable  inputs** | ** ** |
| ** **                               | ** ** | **March 31, 2008** | ** ** | ** ** | **Level 1**                                                            | ** ** | ** ** | **Level 2** | ** ** | ** ** | **Level 3** | ** ** |
| **Assets**                               |       |                         |       |       |                                                                        |       |   |   |   |   |   |   |
| Deferred compensation plan assets        |       | $                            | 1,918      |       |                                                                        | $          | 1,918 |   |   | $ | — |   |   | $ | — |   |
|                                     |       |                         |       |       |                                                                        |       |   |   |   |   |   |   |
| Total assets measured at fair value      |       | 1,918                        |       |       | 1,918                                                                       |       |   | — |   |   | — |   |
|                                     |       |                         |       |       |                                                                        |       |   |   |   |   |   |   |
| Percentage of total assets               |       | 2                            | %          |       | 2                                                                           | %          |   | — |   |   | — |   |
|                                     |       |                         |       |       |                                                                        |       |   |   |   |   |   |   |
| **Liabilities**                          |       |                         |       |       |                                                                        |       |   |   |   |   |   |   |
| Warrant liability                        |       | $                            | 2,599      |       |                                                                        | $          | — |   |   | $ | 2,599 |   |   | $ | — |   |
| Deferred compensation plan liabilities   |       | 1,918                        |       |       | 1,918                                                                       |       |   | — |   |   | — |   |
|                                     |       |                         |       |       |                                                                        |       |   |   |   |   |   |   |
| Total liabilities measured at fair value |       | $                            | 4,517      |       |                                                                        | $          | 1,918 |   |   | $ | 2,599 |   |   | $ | — |   |
|                                     |       |                         |       |       |                                                                        |       |   |   |   |   |   |   |
| Percentage of total liabilities          |       | 7                            | %          |       | 3                                                                           | %          |   | 4 | % |   | — |   |

 

9

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As noted above, the fair value of thedeferred compensation plan assets and liabilities are determined using quotedmarket prices in active markets. The fair value of the warrant liability isdetermined using the Black-Scholes option-pricing model, which uses certainsignificant observable inputs, including stock price (quoted market prices inactive market), warrant exercise price (defined in warrant agreement), expectedlife of warrant (defined in warrant agreement), dividend yields (determined bythe Company), and risk-free interest rate (quoted market prices based onexpected life assumption). The only input in the Black-Scholes option-pricingmodel that is not readily observable is the expected stock price volatility.Because the Company’s historical trading data only dates back to May 3,2004, the first trading date after its spin-off from Accelrys, the Companyestimates its expected volatility using an analysis of the stock pricevolatility of comparable companies in its industry. The fair value of thewarrant liability is subject to significant fluctuations and has ranged fromapproximately $2.6 million as of March 31, 2008 to approximately $6.1million as of March 31, 2007. These fluctuations have primarily resultedfrom fluctuations in the market price of the Company’s common stock, whichranged from $3.65 per share to $5.72 per share at the Company’s quarterlyremeasurement dates since March 31, 2007. Changes in the warrant liabilityare recorded in the statement of operations as income (decreases) or expense(increases).

* *

*Fair Value Option for Financial Assets andLiabilities*

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Liabilities Including anAmendment of FASB Statement No. 115” (SFAS 159). SFAS 159permits reporting entities to choose to measure eligible financial assets orliabilities, which include marketable securities available-for-sale and equitymethod investments, at fair value at specified election dates, or according toa pre-existing policy for specific types of eligible items. Unrealized gains andlosses for which the fair value option has been elected are reported inearnings. SFAS 159 is effective for fiscal years beginning after November 15,2007. The Company’s adoption of SFAS 159, which is effective January 1,2008, did not have a material impact on its consolidated financial statementsas of and for the three months ended March 31, 2008.

 

*Non-Refundable Advance Payments for Goods orServices to Be Used in Future Research and Development Activities*

 

In June 2007, the EITF of the FASBreached a consensus on Issue No. 07-3, “Accounting for NonrefundableAdvance Payments for Goods or Services Received for Use in Future Research andDevelopment Activities” (EITF 07-3). EITF 07-3 requires thatnon-refundable advance payments for goods or services that will be used orrendered for future research and development activities be deferred andcapitalized. As the related goods are delivered or the services are performed,or when the goods or services are no longer expected to be provided, thedeferred amounts would be recognized as an expense. EITF 07-3 is effectivefor financial statements issued for fiscal years beginning after December 15,2007. The Company’s adoption of EITF 07-3, which is effective January 1,2008, did not have a material effect on its consolidated financial statementsas of and for the three months ended March 31, 2008.

 

**3. License Agreements with Bristol-MyersSquibb (DARA program and SARM program)**

 

**DARA License Agreement**

 

In March 2006, the Company andBristol-Myers Squibb Company (BMS) entered into an exclusive licensingagreement (the DARA License Agreement) providing the Company an exclusivelicense under certain BMS patents with respect to worldwide development andcommercialization of certain compounds discovered by BMS that possess dualangiotensin and endothelin receptor antagonist (DARA) activity, including theCompany’s lead product candidate PS433540 and backup development candidates.

 

Under the terms of the DARA LicenseAgreement, 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 DARA License Agreement. In the event the Company fails todeliver such compound libraries to BMS, the Company would be required to makecash payments to BMS on a pro rata basis of up to $0.9 million as of March 31,2008.

 

The Company estimated that the fair value ofthe compound library services to be provided to BMS is approximately$2.0 million. In accordance with SFAS 2 “Accounting for Research andDevelopment Costs,” the Company recorded a non-cash charge of $2.0 millionto proprietary research and development expense related to the acquisition ofthe license to the DARA program during the year ended December 31, 2006.The Company also recorded deferred revenue for the estimated fair value of thecompound library services to be provided. Included in deferred revenue as of March 31,2008 was approximately $1.0 million, all of which was classified asdeferred revenue, current portion. During the three months

 

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ended March 31, 2008, the Company recognized approximately$278 thousand of revenue in connection with these compound libraryservices.

 

During the year ended December 31, 2007, theCompany paid $3.0 million in milestone payments to BMS for the achievement ofcertain clinical and regulatory events and is obligated to pay BMS additionalmilestone payments upon the achievement, if any, of further successive clinicaland regulatory events in the United States and certain other jurisdictions, androyalties on sales of products, if any, resulting from the DARA program. BMShas a limited right of first negotiation in the event that the Company desiresto license compounds that are the subject of the DARA License Agreement to athird party other than BMS.

 

**SARM License Agreement**

 

In October 2007, the Company enteredinto an agreement to acquire the development and commercialization rights toits SARM program from BMS (the SARM License Agreement), including PS178990, aproduct candidate in Phase 1 clinical development for which the Companyintends to conduct further clinical trials. In consideration for the licensesto the SARM program, the Company entered into a discovery collaboration agreementwith BMS (the Discovery Collaboration Agreement) to provide a portion of theCompany’s medicinal chemistry resources to a BMS discovery program unrelated tothe SARM program for a period up to three years.

 

The Company estimated that the fair value ofthe medicinal chemistry services to be provided to BMS is approximately$9.2 million. In accordance with SFAS 2, the Company recorded anon-cash charge of $9.2 million to proprietary research and developmentexpense related to the acquisition of the license to the SARM program duringthe year ended December 31, 2007. The Company also recorded deferredrevenue of approximately $9.2 million during the year ended December 31,2007, which represents the estimated fair value of the medicinal chemistryresources the Company is to provide to BMS under the Discovery CollaborationAgreement.  As of March 31, 2008,approximately $8.5 million was included in deferred revenue, of which, $5.4million was classified as long-term. For the three months ended March 31,2008, the Company recognized approximately $0.8 million, or 12% of net revenue,in connection with the medicinal chemistry resources it provided to BMS.

 

In addition, the Company will pay BMSmilestone payments associated with submission and approval of a therapeuticproduct for marketing and a stepped royalty on net sales of therapeuticproducts, if any, resulting from the SARM program. BMS has a limited right offirst negotiation in the event that the Company desires to license compoundsthat are the subject of the SARM License Agreement to a third party other thanBMS.

 

**4. Significant Collaborations**

 

**ProductDevelopment and Commercialization Agreement with GSK**

 

In March 2006, the Company and GSKentered into a product development and commercialization agreement (the GSKAgreement). Under the terms of the GSK Agreement, the Company has received$15.0 million in cash payments from GSK related to the initial discoveryactivities to be conducted by the Company, including $5.0 million receivedin March 2008. The Company’s role in the alliance with GSK is to (i) identifyand (ii) advance molecules in chosen therapeutic programs to developmentstage and (iii) subject to certain provisions in the GSK Agreement,further develop the candidates to clinical demonstration of efficacy in humans.The Company has agreed that it will not screen its compound library for othercollaborators, or for its own account, against any target it screens under theGSK Agreement for a specified period.

 

The GSK Agreement provides GSK an exclusiveoption, exercisable at defined points during the development process for eachprogram (up to the point of clinical demonstration of efficacy in humans), tolicense that program. Upon licensing a program, GSK is obligated to conductpreclinical development and/or clinical trials and commercialize pharmaceuticalproducts resulting from such licensed programs on a worldwide basis. Inaddition to the cash payments above, the Company is entitled to receivesuccess-based milestone payments, starting in preclinical research, from GSKfor each drug development program under the alliance and the potential fordouble-digit royalties upon the successful commercialization by GSK of anyproduct resulting therefrom.

 

In the event that GSK does not exercise itsoption to license a program, the Company will retain all rights to that programand may continue to develop the program and commercialize any productsresulting from the program, or it may elect to cease progressing the programand/or seek other partners for further development and commercialization.Should the Company develop or partner such a program and commercialize anyproducts resulting from that program, the Company will be obligated to pay GSKsuccess-based milestone payments and royalties upon successfulcommercialization, if any.

 

11

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Since the inception of the GSK Agreement, theCompany has received $15.0 million in connection with initial discoveryactivities the Company is obligated to perform under the GSK Agreement. TheCompany recorded deferred revenue of approximately $14.5 millionassociated with these payments, net of the fair value of the warrants describedbelow. The Company has also received non-refundable milestone payments totaling$1.5 million from GSK related to the identification of three leadcompounds, which were also recorded as deferred revenue due to the Company’scontinuing performance obligations under the GSK Agreement. Included indeferred revenue as of March 31, 2008 was approximately$12.9 million, of which approximately $8.3 million was classified aslong-term. The Company recognizes revenue on a proportional performance basisas it performs the required discovery activities in an amount from time to timeless than or equal to the non-refundable portion of payments received inconnection with the GSK Agreement. The Company’s revenue under the GSKAgreement accounted for approximately $1.1 million and approximately$0.2 million of net revenue for the three months ended March 31, 2008and 2007, respectively. The research activities under the GSK Agreementcommenced in April 2006.

 

In connection with the GSK Agreement, theCompany issued two warrants to GSK for the purchase of up to an aggregate of176,367 shares of its common stock at an exercise price of $5.67 per share,which was a 25% premium over the trailing 30-day closing price averagepreceding March 24, 2006. The warrants are exercisable at any time beforethe earlier to occur of (i) March 24, 2011 and (ii) theeffective date of certain types of termination 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 at thetime of the execution of the GSK Agreement was determined to be$505 thousand. This amount was calculated using the Black-Scholes pricingmodel with the following assumptions: 80% volatility; expected term of5 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 theCompany exercises its discretionary termination right at any time during thefirst five years of the term, under certain circumstances, it could be requiredto refund to GSK a portion of the $15.0 million it has received related toinitial discovery activities to be conducted by the Company referred to above.The amount of any such refund will be calculated based upon when during theterm of the GSK Agreement that termination occurs and the amount of researchfunding the Company had received prior to such termination. However, there areno instances where the deferred revenue would be amortized below the amountthat could be potentially refundable pursuant to the terms of the GSKAgreement. Further, should GSK exercise its discretionary termination rights,there are no provisions in the GSK Agreement that would require the Company torefund payments received relating to its performance of initial discoveryactivities or milestone payments received under the GSK Agreement.

 

**Researchand License Agreement with Wyeth**

 

In December 2006, the Company enteredinto a research and license agreement (the Wyeth Agreement) with Wyeth, actingthrough its Wyeth Pharmaceuticals Division, providing for the formation of anew alliance based on the Company’s Janus Kinase-3 (JAK3) inhibitor program.The alliance’s goal is to identify, develop and commercialize therapeuticproducts for the treatment of certain immunological conditions in humans.

 

The companies each have certain exclusiverights to develop and commercialize products resulting from the JAK3 programand the alliance. The Company retains the right to develop and commercializetherapeutic products for the treatment of dermatological and ocular diseases employingtopical administration, and Wyeth has the right to develop human therapeuticproducts for all other indications and routes of delivery. Under the terms ofthe Wyeth Agreement, the Company has received an up-front non-refundable$5.0 million cash payment, and approximately $4.6 million inquarterly research funding. The Company may also receive an additional$4.7 million, over the remaining portion of the three-year research termthat began in January 2007. In addition, the Company may receive up to$175.0 million if Wyeth achieves preclinical and clinical development andregulatory and commercialization milestones, as well as double-digit royaltieson the net sales of any products commercialized by Wyeth under the alliance.Each company is responsible for all development, regulatory, manufacturing andcommercialization activities for any products it develops and commercializes inits field.

 

The revenue for this research is recognizedon a proportional performance basis, which is expected to approximatestraight-line recognition of revenue over the initial three year term of thealliance. As of March 31, 2008, approximately $3.7 million wasrecorded in deferred revenue, of which approximately $1.3 million wasclassified as long-term. For the three months ended March 31, 2008 and2007, the Company recognized approximately $1.2 million, or 19% of netrevenue, and approximately $1.2 million, or 18% of net revenue, respectively, under the Wyeth Agreement.

 

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Pharmacopeia and Wyeth each have the right toterminate the Wyeth Agreement under certain specified circumstances at any timeduring the term of the Wyeth Agreement. In addition, Wyeth has the right, uponsix months’ prior written notice provided to the Company, to terminate theresearch collaboration and/or the Wyeth Agreement in its entirety or in part.Such right to termination would not apply to Wyeth’s obligations with respectto any program developed by the collaboration and licensed by Wyeth. No terminationwill require the Company to refund to Wyeth any or all of the cash paymentsdescribed above.

 

**Collaborationand License Agreement with Cephalon**

 

In May 2006, the Company entered into aCollaboration and License Agreement (the Cephalon Agreement) with Cephalon, Inc.(Cephalon) providing for the formation of a new drug discovery, development andcommercialization alliance. Under the Cephalon Agreement, the Company receivedan up-front, non-refundable payment of $15.0 million in June 2006 tosupport the Company’s research efforts.

 

Cephalon is responsible for identifying hitand lead compounds, which the Company and Cephalon will then workcollaboratively to advance the lead compounds to clinical candidates. TheCompany is principally responsible for medicinal chemistry research andCephalon provides biology support, including preclinical disease models, asrequired by the Cephalon Agreement. The Company has agreed that, for aspecified period, it will not screen its compound library for other collaborators,or for its own account, against any target it works on under the CephalonAgreement.

 

Upon the nomination of any clinicalcandidates by the alliance, Cephalon will be primarily responsible for theirdevelopment and commercialization. The Company will retain an option to developcertain candidates from the alliance, subject to Cephalon’s agreeing to suchdevelopment. For any preclinical development candidate advanced under thealliance, the developing company will make clinical, regulatory and sales milestonepayments to the non-developing company. In addition, the companycommercializing any resulting product will pay the non-commercializing companyup to double-digit royalties based on the sales level achieved.

 

As stated above, under the Cephalon Agreement,the Company received a non-refundable payment of $15.0 million and isprincipally responsible for performing medicinal chemistry research. Therevenue for this research is recognized on a proportional performance basis,which is expected to approximate straight-line recognition of revenue over theinitial three year term of the alliance. Included in deferred revenue at March 31,2008 was approximately $5.8 million related to the Cephalon Agreement, ofwhich approximately $0.8 million was classified as long-term. The Companyrecognized approximately $1.3 million, or 20% of net revenue, for eachthree month period ended March 31, 2008, and 2007, under the CephalonAgreement. The research activities under the Cephalon Agreement commenced in June 2006.

 

The Company and Cephalon each have the rightto terminate the Cephalon Agreement under certain specified circumstances atany time during the term of the Cephalon Agreement. In addition, Cephalon hasthe right to terminate the Cephalon Agreement in its sole discretion, uponninety days written notice to the Company, during the initial three-year phaseof the alliance, which phase may be extended by agreement of the parties. Nosuch termination shall require the Company to refund to Cephalon any or all of theabove research and development funding.

 

One of the Company’s directors currentlyserves as the Chairman and Chief Executive Officer of Cephalon.

 

**Collaborationand License Agreement with Schering-Plough**

 

In February 2007, the Company enteredinto an amended and restated collaboration and license 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 followed the companies’ past collaborations, including the February 2002agreement between the Company and Organon (the 2002 Collaboration). In November 2007,Organon was acquired by, and is now a part of, Schering-Plough. The Companyrefers to the February 2007 amended and restated collaboration and licenseagreement with Organon as the 2007 Schering-Plough Agreement.

 

Since entering into the 2007 Schering-PloughAgreement, the Company has received an up-front payment of $15.0 million,$1.0 million for the transfer of rights to certain programs from the 2002Collaboration, and $5.0 million in quarterly research funding. The 2007Schering-Plough Agreement provides that the Company may also receive up to anadditional $4.0 million per year in quarterly research funding over theremaining portion of the five-year research term of the alliance, which beganin February 2007. The 2007 Schering-Plough Agreement also provides thatthe Company waives its rights to receive further compensation(e.g., future milestone and royalty payments) with respect to programsresulting from

 

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lead series identified by the Company and delivered to Organon underthe 2002 Collaboration and certain other programs from earlier agreements.

 

The 2007 Schering-Plough Agreement providesthe Company the option to purchase the right to co-develop and co-commercializecertain therapeutic candidates discovered through the alliance. For therapeuticcandidates the Company does not elect to co-develop and co-commercialize,Schering-Plough will retain exclusive development and commercialization rights,and the Company will receive milestone payments as a result of Schering-Plough’ssuccessful advancement, if any, of each candidate through clinical development,and up to double-digit royalties based on commercialization of any resultingpharmaceutical products.

 

The revenue associated with the research theCompany performs under the 2007 Schering-Plough Agreement is recognized on aproportional performance basis. The Company has received $21.0 million inconnection with the 2007 Schering-Plough Agreement which the Company recordedas deferred revenue. Included in deferred revenue as of March 31, 2008 wasapproximately $16.5 million related to the 2007 Schering-Plough Agreement,of which approximately $9.5 million was classified as deferred revenue,long-term. For the three months ended March 31, 2008, the Companyrecognized approximately $1.5 million, or 24%, of net revenue inconnection with the 2007 Schering-Plough Agreement. For the three months ended March 31,2007, the Company recognized approximately $0.5 million, or 8%, of net revenueunder the 2007 Schering-Plough Agreement and the 2002 Collaboration, theresearch term of which ended February 2007.

 

Both Pharmacopeia and Schering-Plough havethe right to terminate the 2007 Schering-Plough Agreement under certainspecified circumstances at any time during the term of the 2007 Schering-PloughAgreement. In addition, the Company and Schering-Plough each have the right toterminate the 2007 Schering-Plough 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 time beginningtwo and one-half years after February 8, 2007, to terminate the researchportion of the alliance and/or the 2007 Schering-Plough Agreement. Such atermination of the research portion of the alliance by Schering-Plough wouldnot apply to Schering-Plough’s obligations with respect to any programdeveloped by the alliance that Schering-Plough is advancing or to therapeuticcandidates with respect to which the Company has previously exercised itsoption to purchase the right to co-develop and co-commercialize. ShouldSchering-Plough exercise its discretionary termination right, there are noprovisions in the 2007 Schering-Plough Agreement that would require the Companyto refund payments received under the 2007 Schering-Plough Agreement. 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 2007 Schering-Plough Agreement the Company’sdiscretionary termination right is exercised. However, until such time as theCompany is no longer subject to the termination fee, there will be no instanceswhere the deferred revenue associated with the 2007 Schering-Plough Agreementwould be amortized below $5.0 million.

 

**AdditionalCollaboration and License Agreements with Schering-Plough**

 

In April 2007, the Company completed itsresearch activities under its then-existing agreements with Schering-Plough. Pursuantto the terms of the Company’s agreements with Schering-Plough in which theCompany’s research activities have ceased, the cessation of those researchactivities did not affect other areas of those collaborations, including theongoing Phase 2 and Phase 1 clinical trials and multiple preclinicalprograms that Schering-Plough is conducting. The Company continues to beentitled to payments resulting from the successful achievement bySchering-Plough, if any, of clinical milestones, as well as royalty paymentsfrom sales, if any, of products resulting from compounds already delivered bythe Company and accepted by Schering-Plough under those collaborations.

 

For the three months ended March 31,2007, the Company’s collaborations with Schering-Plough under which the Company’sresearch activities have ceased accounted for approximately $1.8 million,or 28%, of net revenue in the period, including $1.0 million in milestonerevenue.  There was no revenue recognizedin the three months ended March 31, 2008 in connection with thosecollaborations with Schering-Plough.

 

**OtherItems**

 

For the three months ended March 31,2008, the Company recognized approximately $0.8 million, or 12% of net revenue,in connection with  its DiscoveryCollaboration Agreement with BMS. See Note 3 above for further discussion ofthe Company’s Discovery Collaboration Agreement with BMS. Except as disclosedabove, no other collaborator accounted for more than 10% of the Company’s totalrevenue in the three months ended March 31, 2008.

 

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In the three months ended March 31, 2007, as part of itscollaboration with Biovitrum, the Company earned $1.0 million in milestonerevenue for delivering an advanced lead compound that Biovitrum accepted.  The milestone revenue, for which the Companyreceived payment in February 2007, accounted for 16% of net revenue forthe three months ended March 31, 2007.

 

**5. Business Segment and GeographicalInformation**

 

The Company classifies its businessoperations in one operating segment. All of the Company’s revenues aregenerated from this segment. Revenue was derived from collaborators located inthe following geographic regions:

 
| ** **            | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------|------------|------------------------------------------------------|------------|
| ** **            | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Customers located in: |       |                                                 |       |   |   |
| United States         |       | 76                                                   | %          | 61 | % |
| Europe                |       | 24                                                   | %          | 39 | % |

 

6**. Share-basedCompensation**

 

The fair value of the Company’s equity awardswas estimated at the date of grant using the Black-Scholes option-pricing modelwith the following weighted average assumptions for the three months ended March 31,2008 and 2007, respectively:

 
| ** **              | ** ** | **2008** | ** ** | ** ** | **2007** | ** ** | ** ** |
|-------------------------|------------|----------|------------|------------|----------|------------|------------|
| Dividend yield          |       | 0        | %          |       | 0        | %          |       |
| Expected volatility     |       | 75.00    | %          |       | 90.00    | %          |       |
| Risk-free interest rate |       | 3.18     | %          |       | 4.51     | %          |       |
| Expected life (years)   |       | 6.25     |       |       | 6.25     | %          |       |
| Forfeiture Rate         |       | 3.10     | %          |       | 4.26     | %          |       |

 

For the three months ended March 31,2008 and 2007 total share-based compensation costs associated with the adoptionof SFAS 123R were approximately $635 thousand, and $490 thousand,respectively. As of March 31, 2008, there was approximately$5.1 million of unrecognized compensation costs, net of estimatedforfeitures, related to share-based payments which are expected to berecognized over a weighted average period of 2.9 years. The cash proceedsfrom options exercised during the three months ended March 31, 2008 and2007 were approximately $4 thousand and $517 thousand, respectively.  In addition to the expense incurred relatedto stock option grants, during the three months ended March 31, 2008 and2007, the Company incurred share-based compensation costs of approximately$5 thousand and $10 thousand, respectively, relating to stock optionsgranted to consultants.  For the threemonths ended March 31, 2007, the Company incurred $13 thousand of share-basedcompensation costs, relating to the vesting of restricted stock awards. Theserestricted stock awards fully vested in March 2007, and therefore, therewas no such expense during the three months ended March 31, 2008.

 

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

 

In December 2006, the Company enteredinto a loan and security agreement (the Line of Credit) with a lendinginstitution. The Line of Credit is intended to provide the Company withfunding, in exchange for a security interest in certain of the Company’sequipment. The Line of Credit provides up to a total of $5.0 million infunding in the form of term loans, from time to time through December 2008.Term loans secured by laboratory equipment have a fixed term of 48 months.Term loans secured by all other collateral categories have a fixed term of36 months.

 

As of March 31, 2008, the aggregatebalance of loans originated under the Line of Credit was approximately$4.3 million, of which approximately $3.0 million was classified asnotes payable, long-term. Interest rates on these loans

 

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range from 10.08% to 10.28%. Additionally, the Company hadapproximately $0.3 million available for borrowings under the Line ofCredit as of March 31, 2008.

 

**8. Warrant Liability**

 

Inconnection with its October 2006 financing, the Company issuedapproximately 1,450,000 warrants to purchase its common stock. UnderEITF 00-19, to qualify as permanent equity, an equity derivative mustpermit the issuer to settle in unregistered shares. Under securities law, ifthe warrants were issued in connection with a public offering and have a cashsettlement feature at the holder’s option, a company does not have the abilityto settle in unregistered shares. Therefore, the warrants cannot be classifiedas permanent equity and are instead classified as a liability. The warrantsthat the Company issued as part of its equity financing in October 2006meet this criteria, and have been recorded as a liability in the accompanyingbalance sheet. The fair value of the warrants was determined as of October 18,2006, and the Company recorded a liability relating to the issuance of thewarrants of approximately $4.5 million. Equity derivatives not qualifyingfor permanent equity accounting are recorded at fair value on the measurementdate, and are remeasured at each reporting date until the warrants areexercised or have expired. Changes in the fair value of the warrants arereported in the statement of operations as income or expense. At March 31,2008, the fair value of the warrants decreased to approximately$2.6 million from approximately $4.2 million as of December 31, 2007.As a result of this decrease, the Company recorded approximately$1.6 million in income in the statement of operations for the three monthsended March 31, 2008. At March 31, 2007, the fair value of thewarrants had increased to approximately $6.1 million from approximately$4.4 million as of December 31, 2006. As a result of this increase, theCompany recorded approximately $1.7 million in expense in the statement ofoperations for the three months ended March 31, 2007.

 

The fair value of the warrants werecalculated using the Black-Scholes option- pricing model with the followingassumptions at the respective measurement dates:

 
| ** **              | ** ** | **March 31,** | ** ** | ** ** | **December 31,** | ** ** | ** ** | **March 31,** | ** ** | ** ** | **December 31,** | ** ** | ** ** |
|-------------------------|------------|--------------------|------------|------------|-----------------------|------------|------------|--------------------|------------|------------|-----------------------|------------|------------|
| ** **              | ** ** | **2008**           | ** ** | ** ** | **2007**              | ** ** | ** ** | **2007**           | ** ** | ** ** | **2006**              | ** ** | ** ** |
| Dividend yield          |       | 0                  | %          |       | 0                     | %          |       | 0                  | %          |       | 0                     | %          |       |
| Expected volatility     |       | 75.00              | %          |       | 80.00                 | %          |       | 90.00              | %          |       | 90.00                 | %          |       |
| Risk-free interest rate |       | 2.13               | %          |       | 3.45                  | %          |       | 4.54               | %          |       | 4.70                  | %          |       |
| Expected life (years)   |       | 4.05               |       |       | 4.30                  |       |       | 5.05               |       |       | 5.30                  |       |       |
| Stock Price             |       | $                  | 3.65       |       |                  | $          | 4.77       |               |       | $          | 5.69                  |       |       | $ | 4.26 |   |   |
| Exercise Price          |       | $                  | 5.14       |       |                  | $          | 5.14       |               |       | $          | 5.14                  |       |       | $ | 5.14 |   |   |

 

**9. Commitments and Contingencies**

 

**DARALicense Agreement with BMS**

 

Under the terms of the DARA LicenseAgreement, 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. As of March 31, 2008, the Company hadapproximately $1.0 million of deferred revenue related to compoundlibraries that the Company will provide after March 31, 2008. In the eventthe Company fails to deliver the aforementioned compound libraries to BMS, theCompany would be required to make cash payments on a pro rata basis of up toapproximately $0.9 million.

 

In addition, the Company will pay BMSmilestone payments upon the achievement of successive clinical and regulatoryevents in the United States and certain other jurisdictions, and royalties onsales of products, if any, resulting from the DARA program.

 

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**SARMLicense Agreement with BMS**

 

In consideration for the licenses to the SARMprogram, in October 2007, the Company also entered into the DiscoveryCollaboration Agreement with BMS. The Discovery Collaboration Agreementprovides that the Company will apply a portion of its medicinal chemistryresources to a BMS discovery program that is unrelated to the SARM program forup to three years. The Company recorded deferred revenue of $9.2 millionwhich approximates the fair value of the chemistry resources that the Companyis to provide to BMS.  As of March 31,2008, the Company had approximately $8.5 million of deferred revenuerelated to services that it is to provide under the Discovery CollaborationAgreement after March 31, 2008.

 

In addition, the Company will pay BMSmilestone payments associated with submission and approval of a therapeuticproduct for marketing and a stepped royalty on net sales of therapeuticproducts, if any, resulting from the SARM program

 

**ProductDevelopment and Commercialization Agreement with GSK**

 

Under the GSK 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 types ofagreements. If the Company exercises its discretionary termination right at anytime during the first five years of the term, under certain circumstances, itcould be required to refund to GSK a portion of the $15.0 million it hasreceived related to initial discovery activities to be conducted by theCompany. The amount of any such refund will be calculated based upon whenduring the term of the GSK Agreement that termination occurs. However, thereare no instances where the deferred revenue would be amortized below the amountthat could be potentially refundable pursuant to the terms of the GSKAgreement. Further, should GSK exercise its discretionary termination rights,there are no provisions in the GSK Agreement that would require the Company torefund payments received relating to its performance of initial discoveryactivities under the GSK Agreement.

 

The Company’s role in the alliance is to (i) identifyand (ii) advance molecules in chosen therapeutic programs to developmentstage and (iii) subject to certain provisions in the GSK Agreement,further develop the candidates to clinical demonstration of efficacy in humans. As of March 31, 2008, the Companyhad approximately $12.9 million of deferred revenue related to servicesthat are to be provided under the GSK Agreement by the Company after March 31,2008.

 

**Researchand License Agreement with Wyeth**

 

Under the Wyeth Agreement, the Company hasreceived an up-front, non-refundable payment of $5.0 million andapproximately $4.6 million in quarterly research funding since January 2007to support the Company’s research efforts. As of March 31, 2008, theCompany had approximately $3.7 million of deferred revenue related toservices that the Company is to provide under the Wyeth Agreement after March31, 2008.

 

**Collaborationand License Agreement with Cephalon**

 

Under the Cephalon Agreement, the Companyreceived an up-front, non-refundable payment of $15.0 million in June 2006to support the Company’s research efforts. The Company is principallyresponsible for performing medicinal chemistry research over the alliance term.As of March 31, 2008, the Company had approximately $5.8 million ofdeferred revenue related to services that are to be provided under the CephalonAgreement by the Company after March 31, 2008.

 

**Collaborationand License Agreement with Schering-Plough**

 

Under the 2007 Schering-Plough Agreement, theCompany has received $21.0 million (the $15.0 million up-frontpayment, $1.0 million for the transfer of rights to certain programs fromthe 2002 Collaboration, and $5.0 million in quarterly research funding) since February 2007to support its research efforts. As of March 31, 2008, the Company hadapproximately $16.5 million of deferred revenue related to services it isto provide under the 2007 Schering-Plough Agreement after March 31, 2008.

 

In addition, if the Company exercises itsdiscretionary termination right, under certain circumstances, the Company couldbe subject to a termination fee of $5.0 million. Whether or not theCompany is subject to the termination fee is based upon when during the term ofthe 2007 Schering-Plough Agreement the Company exercise its discretionarytermination right.

 

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However, until such time as the Company is no longer subject to thetermination fee, there will be no instances where the deferred revenueassociated with the 2007 Schering-Plough Agreement would be amortized below$5.0 million.

 

**Milestoneand Royalty Commitments**

 

Under the terms of certain agreements towhich the Company is a party, it is possible that the Company may becomeobligated to pay aggregate milestone payments totaling up to $287 millionupon the achievement of successive clinical and regulatory events and royaltieson sales of products, if any, resulting from programs for which the Company hasdevelopment responsibility under such agreements. The Company will not beresponsible for the payment of future milestone and/or royalty payments in theevent that development of such a program is discontinued. Preclinical andclinical development of drug candidates is a long, expensive and uncertainprocess. At any stage of the preclinical or clinical development process, theCompany may decide to discontinue the development of its product candidates. Todate, none of the compounds to which the Company holds complete or partialrights has reached the stage of commercial product. The Company expects that itsproduct candidates will not be commercially available for many years, if ever.

 

**ProductManufacturing Contracts**

 

The Company has entered into contracts withthird parties related to the manufacturing of materials that are to be used inconnection with the Company’s clinical trials for PS433540. The terminationprovisions for these contracts are such that, as of March 31, 2008, theCompany had aggregate commitments thereunder totaling approximately$4.0 million, which are expected to be fulfilled during the year ended December 31,2008.

 

**10. Related Party Transactions**

 

A member of Pharmacopeia’s board of directorscurrently serves as the Chairman and Chief Executive Officer of Cephalon. In June 2006,the Company received an up-front non-refundable $15.0 million payment tosupport the Company’s research efforts under the Cephalon Agreement. TheCompany recognized revenue of approximately $1.3 million, or 20% of netrevenue, relating to this alliance during each three month period ended March 31,2008 and 2007.

 

A member of Pharmacopeia’s clinical advisoryboard also is affiliated with a contract research organization (CRO) that theCompany has contracted with to conduct one of its clinical trials. For thethree months ended March 31, 2008, the Company incurred expense ofapproximately $0.8 million related to the clinical trial this CRO isconducting. There was no such expense for the three months ended March 31,2007.

 

**11. Subsequent Events**

 

On April 10, 2008, the Company announced that Leslie J. Browne,Ph.D., its former President, Chief Executive Officer, and member of its Boardof Directors has resigned, effective April 9, 2008. The Company alsoannounced that the Company’s Chairman of its Board of Directors, Joseph A.Mollica, Ph.D. will serve as Interim President and Chief Executive Officeruntil a permanent successor is appointed.

 

In connection with a separation agreement between the Company and Dr. Browne,the Company expects to record a charge of approximately $0.9 million in thethree months ending June 30, 2008.

 

On April 30, 2008, at the 2008 annual meeting of stockholders ofthe Company, the stockholders approved an amendment to the Company’s Amendedand Restated Certificate of Incorporation to increase the number of authorizedshares of the Company’s common stock from 50,000,000 to 100,000,000.  Also on April 30, 2008, the Board ofDirectors of the Company approved an increase in the number of sharesdesignated as Series A Junior Participating Preferred Stock of the Companyfrom 5,000 to 10,000.

 

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

 

**FORWARD-LOOKING STATEMENTS**

 

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,targets or future development and/or otherwise are not statements of historicalfact. These forward-looking statements are based on our

 

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current expectations and projections about future events and they aresubject to risks and uncertainties known and unknown that could cause actualresults and developments to differ materially from those expressed or impliedin such statements. These forward-looking statements include statements aboutthe following:

 

·                  ourplans to develop PS433540, a Phase 2 product candidate from our DARAprogram, and our existing and proposed Phase 2 and Phase 1 clinicalstudies with respect to PS433540, including timing and expected outcomes ofsuch studies;

 

·                  ourability to raise additional funds;

 

·                  ourplans to develop PS178990, a Phase 1 product candidate from our SARMprogram;

 

·                  ourplans to develop PS031291, a preclinical development product candidate from ourchemokine receptor CCR1 program;

 

·                  ourestimates of the market opportunity for our product candidates, includingPS433540, PS178990 and PS031291;

 

·                  ourability to successfully perform under our agreements with Bristol-Myers SquibbCompany, GlaxoSmithKline, Wyeth, Cephalon and Schering-Plough;

 

·                  ourability to build our pipeline of novel drug candidates through our owninternally-funded drug discovery and development programs, third partycollaborations, in-licensing and acquisitions;

 

·                  theexpiration of the initial research terms of our alliances with Cephalon and Wyethin May and December 2009, respectively;

 

·                  ourexpectations concerning the development priorities of our collaborators, theirability to successfully develop compounds and our receipt of milestones androyalties;

 

·                  ouranticipated operating results, financial condition, liquidity and capital resources;

 

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

 

·                  ourability to pursue the development of new compounds and other business matterswithout infringing the patent rights of others;

 

·                  ourability to 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 undue relianceon any such forward-looking statements, any of which may turn out to be wrongdue to inaccurate assumptions, unknown risks, uncertainties or other factors.  Factors that could cause or contribute todifferences 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 well as 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*.  We undertake no obligation to (and expresslydisclaim any such obligation to) revise or update the statements made herein orthe risk factors that may relate thereto whether as a result of newinformation, future events or otherwise.

 

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

 

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**TheCompany**

** **

**Overview**

 

We are a clinical development stage biopharmaceuticalcompany dedicated to discovering and developing novel small moleculetherapeutics to address significant medical needs. Our strategy is to retainproduct candidates at least to clinical validation, and to continue developmenton our own to New Drug Application (NDA) filing and commercialization forselected indications. We have a broad portfolio of clinical and preclinicalcandidates under development internally or by partners.

 

PS433540, our lead product candidate we aredeveloping internally, is in Phase 2 clinical development. PS433540 is aDual-Acting angiotensin and endothelin Receptor Antagonist (DARA) that wein-licensed from Bristol-Myers Squibb Company (BMS) and that is being developedas a potential treatment for cardiovascular and renal diseases, includinghypertension and diabetic nephropathy. Our license agreement with BMS providesus with an exclusive license under certain BMS patents with respect toworldwide development and commercialization of PS433540, as well as certainother compounds discovered by BMS that possess DARA activity. There isconsiderable preclinical and initial clinical data suggesting thatsimultaneously blocking the actions of both angiotensin and endothelin byco-administration, compared to either agent alone, may provide significantlyimproved treatment options for several cardiovascular diseases. In September 2007,we announced the initiation of a Phase 2a clinical trial of PS433540 insubjects with Stage I and Stage II hypertension. We expect resultsfrom the trial in the second quarter of 2008. In March 2008, we initiateda Phase 2b clinical trial designed to further evaluate safety and efficacyof PS433540 in subjects with Stage I and Stage II hypertension. Weexpect results from this trial by the end of 2008. The patient populations, ifany, that PS433540 addresses will be determined based its safety and efficacyprofile.

 

In October 2007, we entered into anadditional license agreement with BMS providing us exclusive worldwidedevelopment and commercialization rights to a selective androgen receptormodulator (SARM) program (the SARM program). PS178990 is the lead compound inthe SARM program and is in Phase 1 clinical development. PS178990 is anon-steroidal SARM that was designed to provide the benefits of testosterone topatients without unwanted side effects on the prostate. BMS completed aPhase 1 single ascending dose study with PS178990. We expect to initiateadditional Phase 1 studies for PS178990 in 2008 and initiate aPhase 2 study of the compound in the first half of 2009.

 

In February 2008, we announced thenomination of PS031291 as a preclinical development compound from our internalchemokine receptor CCR1 program. PS031291 is a potent and highly selectiveantagonist at the chemokine receptor CCR1, which has been implicated in playinga significant role in multiple inflammatory and autoimmune disease processes.We believe PS031291 may possess significant potential in the treatment ofvarious inflammatory diseases including rheumatoid arthritis. We expect toinitiate good laboratory practice (often referred to as GLP) toxicology studieson PS031291 in the second quarter of 2008.

 

We also have certain other agreements withleading pharmaceutical and biotechnology companies, including Schering-Plough,BMS and Celgene Corporation (Celgene), where we have completed our researchactivities and the partner is now responsible for the development of potentialtherapeutic products. Our collaborative research efforts with Schering Plough,BMS and Celgene have resulted in a portfolio that includes two partneredprograms currently in Phase 2 clinical trials targeting chronicobstructive pulmonary disease (COPD) in the first instance and psoriasis,rheumatoid arthritis and atherosclerosis in the second instance, as well asfour partnered programs in active Phase 1 clinical trials targetingoncology, inflammatory and respiratory diseases. Associated with these clinicaldevelopment programs, we have received milestone payments from Schering-Plough,BMS and Celgene and, to the extent the compounds successfully progress throughclinical 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 the compounds in clinicaldevelopment, two other of our partnered programs are in preclinicaldevelopment, the point at which compounds are tested for safety in animals andare subjected to other studies required prior to testing compounds in humans.

 

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In addition to our proprietary research anddevelopment, we currently have collaborations under which we are activelyperforming research and development activities with leading pharmaceutical andbiotechnology companies, including GlaxoSmithKline, Wyeth, Cephalon andSchering-Plough. While the nature of our collaborative relationships vary witheach of these companies, we retain certain development and/or commercializationrights under the terms of each agreement.

 

Clinical and preclinical development ofproduct drug candidates is a long, expensive and uncertain process thatrequires us to raise funds from time to time to support our internaldevelopment programs. We expect to raise funds from one or a combination ofapproaches, which could include public and/or private financing, sale and/orpartnering of one or more of our internal programs, and partnering of ourinternal drug discovery capabilities. We continue to pursue the discovery anddevelopment of product candidates in both our internal and collaborativeprograms. The product candidates described above are at early stages and none havereceived regulatory approval for commercial sale. All of the compounds face thesubstantial risk of failure inherent in drug discovery and development. At anystage of the clinical development process, we or our collaborators may decideto discontinue development of our product candidates. To date, none of thecompounds in which we hold complete or partial rights has reached the stage ofa commercial product and, although we have received license and milestone fees,we may never receive any sales revenues, royalty payments or any additionallicense and milestone fees, under our current or any future collaborations. Wedo not expect that our product candidates will be commercially available formany years, if ever.

 

From time to time we have considered, and wewill continue to consider, strategic initiatives intended to further thedevelopment of our business. In addition, we consider opportunities to expandour product pipeline through the acquisition or in-licensing of, or investmentin, product development candidates, and we intend to continue to explore thoseopportunities.

 

**Liquidity and Capital Resources**

 

As of March 31, 2008, we had cash and cashequivalents of $61.5 million compared to cash, cash equivalents andmarketable securities of $71.3 million at December 31, 2007,representing 77% and 79% of our total assets, respectively. We make investmentsin highly liquid investment-grade marketable securities, including corporatebonds, and United States government and agency securities. As of March 31,2008, our investment portfolio included no auction rate securities.   In addition, as of March 31, 2008, wehad deferred revenue of $48.5 million relating to research and developmentactivities that are to be performed by us subsequent to March 31, 2008.

 

The following is a summary of selected cashflow information for the three months ended March 31, 2008 and 2007:

 
| ** **                                           | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Net loss                                             |       | $                                                    | (11,718    | ) | $ | (10,004 | ) |
| Adjustments for noncash operating items              |       | (70                                                  | )          | 2,851 |   |
|                                                 |       |                                                 |       |   |   |
| Net cash operating loss                              |       | (11,788                                              | )          | (7,153 | ) |
| Net change in assets and liabilities                 |       | 2,966                                                |       | 20,618 |   |
|                                                 |       |                                                 |       |   |   |
| Net cash (used in) provided by operating  activities |       | $                                                    | (8,822     | ) | $ | 13,465 |   |
|                                                 |       |                                                 |       |   |   |
| Net cash provided by investing activities            |       | $                                                    | 39,910     |   | $ | 1,567 |   |
|                                                 |       |                                                 |       |   |   |
| Net cash provided by financing activities            |       | $                                                    | 191        |   | $ | 517 |   |

 

**Net cash (used in) provided by operatingactivities**

 

Net cash used in operating activities for thethree months ended March 31, 2008 was primarily due to cash used to fundboth our proprietary internal drug research and development efforts, includingour Phase 2 and Phase 1 clinical trials for PS433540, and thefulfillment of our research and development performance obligations under ourcollaborations, offset by the receipt of a $5.0 million payment receivedin March 2008 relating to additional research funding under the GSKAgreement.  Absent the receipt of the$5.0 million from GSK, our net cash used in operating activities wouldhave been approximately $13.8 million.

 

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Net cash providedby operating activities for the three months ended March 31, 2007 resultedprimarily from the receipt of a $5.0 million upfront non-refundable paymentreceived in January 2007 relating to the Wyeth Agreement and a $15.0million upfront non-refundable payment received in March 2007 relating tothe 2007 Schering-Plough Agreement, offset by cash used to fund both ourproprietary internal drug research and development efforts, including our Phase1 clinical trials for PS433540, and the fulfillment of our research anddevelopment performance obligations under our collaborations. Absent thereceipt of the $20.0 million from Wyeth and Schering-Plough, our net cash usedin operating activities would have been approximately $6.5 million.

 

**Net cash provided by investing activities**

 

Net cash provided by investing activities forthe three months ended March 31, 2008 related primarily to the maturity ofmarketable securities offset by capital expenditures related to the expansionof our facilities and capital expenditures for research and development andinformation technology equipment and software.

 

Net cash provided by investing activities forthe year ended March 31, 2007 related primarily to the net sales andmaturities of marketable securities, partially offset by capital expendituresfor research and development and information technology equipment and software.

 

**Net cash provided by financing activities**

 

Net cash providedby financing activities for the three months ended March 31, 2008consisted primarily of proceeds, net of repayments, of approximately $0.2million received from loans originated under our Line of Credit.

 

Net cash providedby financing activities for the three months ended March 31, 2007consisted primarily of proceeds from the issuance of common stock in connectionwith exercises of stock options.

 

**Liquidity and Capital Resources Outlook**

 

As of March 31, 2008, we had cash andcash equivalents of approximately $61.5 million. In addition, as of March 31,2008, we had deferred revenue of approximately $48.5 million relating toresearch and development activities that are to be performed by us subsequentto March 31, 2008. Our cash used in operating activities for the threemonths ended March 31, 2008 was approximately $8.8 million, whichincluded $5.0 million in research funding we received from GSK. Excludingthis receipt, our cash used in operating activities would have beenapproximately $13.8 million. We expect that our research and developmentexpenditures will continue to increase in the future as we increase ourinternal drug research and development efforts. Clinical and preclinicaldevelopment of drug candidates is a long, expensive and uncertain process thatrequires us to raise funds from time to time to support our internaldevelopment programs. We expect to raise funds from one or a combination ofapproaches, which could include public and/or private financing, sale and/orpartnering of one or more of our internal programs, and partnering of ourinternal drug discovery capabilities.

 

Conducting our own drug research anddevelopment is a key component of our business model. We are currentlyconducting Phase 2 and Phase 1 clinical trials for PS433540, our leadproduct candidate from our DARA program that we are developing internally. In September 2007,we announced the initiation of a Phase 2a clinical trial of PS433540 insubjects with Stage I and Stage II hypertension. In March 2008,we initiated a Phase 2b clinical trial designed to further evaluate safetyand efficacy of PS433540 in subjects with Stage I and Stage IIhypertension. Conducting these Phase 2 clinical trials, in addition toother Phase 1 clinical trials that will need to be conducted, will significantlyincrease our proprietary research and development costs.

 

In October 2007, we acquired thedevelopment and commercialization rights to the SARM program from BMS,including PS178990, a product candidate in Phase 1 clinical developmentfor which we intend to conduct further clinical trials. In consideration forthe licenses to the SARM program, we entered into the Discovery CollaborationAgreement with BMS to provide a portion of our medicinal chemistry resources toa BMS discovery program unrelated to the SARM program for a period up to threeyears. Additionally, progressing the SARM program, specifically our productcandidate PS178990, through clinical trials is expected to further increase ourproprietary research and development costs.

 

As part of our collaborative agreements withGSK, Wyeth, Cephalon and Schering-Plough, we have received up-front cashpayments. In connection with these agreements and the Discovery CollaborationAgreement with BMS, we are obligated to perform significant research anddevelopment activities over multiple years and as such, expect to incursignificant costs performing such activities. The following table provides theexpiration of the initial research term during which these research and

 

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development activities are to be provided, as well as the deferredrevenue currently recorded for each agreement as of March 31, 2008:

 
| **Collaborative Agreement**      | ** ** | **Expiration of  Initial Research Term** | ** ** | **Deferred Revenue  as of  March 31, 2008** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
|                                  |       |                                                    |       |                                                            |       |
| 2007 Schering-Plough Agreement        |       | February 2012                                      |       | $                                                               | 16,543     |   |
| GSK Agreement                         |       | March 2011                                         |       | 12,944                                                          |       |
| BMS Discovery Collaboration Agreement |       | December 2010                                      |       | 8,456                                                           |       |
| Cephalon Agreement                    |       | May 2009                                           |       | 5,833                                                           |       |
| Wyeth Agreement                       |       | December 2009                                      |       | 3,697                                                           |       |
| Other                                 |       | March 2009(1)                                      |       | 1,060                                                           |       |
|                                  |       |                                                    |       | $                                                               | 48,533     |   |

 

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(1) March 2009 represents thelatest expiration of agreements in this category.

 

Since February 2007, under the 2007Schering-Plough Agreement, we have received $21.0 million (a$15.0 million up-front payment, $1.0 million for the transfer ofrights to certain programs from the 2002 Collaboration, and $5.0 million inquarterly research funding). We may receive up to an additional$15.0 million of research and development funding over the remainingportion of the five-year research term, which began in February 2007.

 

Since January 2007, we have receivedapproximately $9.6 million in connection with our research and licenseagreement with Wyeth (a $5.0 million up-front payment and approximately$4.6 million in quarterly research funding). We may receive an additional$4.7 million of research and development funding over the remainingportion of the three-year research term, which began in January 2007.

 

As of March 31, 2008, we had borrowingsassociated with our Line of Credit of approximately $4.3 million, whichhave repayment terms ranging from 36 to 48 months, including approximately$1.3 million that is classified as current. We also had approximately$0.3 million available for borrowings under our Line of Credit as of March 31,2008.

 

We anticipate that our capital resources willbe adequate to fund our operations at their current levels at least through March 31,2009. However, there can be no assurance that changes will not occur that wouldconsume available capital resources before then.

 

Our capital requirements depend on competingtechnological and market developments, changes in our existing collaborativerelationships, progress of PS433540 and PS178990 in clinical trials, the costof filing, prosecuting, defending, and enforcing patent claims and otherintellectual property rights and the outcome of related litigation, thepurchase of additional capital equipment, acquisitions of other businesses ortechnologies, and the progress of our collaborators’ milestone and royaltyproducing activities. Prior to exhausting our current capital resources, wewill need to raise additional funds to finance our operating activities orenter into strategic initiatives intended to further the development of ourbusiness. There can be no assurance that additional funding, if necessary, willbe available to us on favorable terms, if at all. Our forecasts of the periodof time through which our financial resources will be adequate to support ouroperations are forward-looking information and actual results could vary. Thefactors described earlier in this section will impact our future capitalrequirements and the adequacy of our available funds.

 

**Results of Operations**

 

This section should be read in conjunctionwith the discussion above under “Liquidity and Capital Resources.”

 

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**ThreeMonths Ended March 31, 2008 and 2007**

 

Our net revenue decreased2% to $6.2 million in the three months ended March 31, 2008 comparedto $6.3 million in the three months ended March 31, 2007. Net revenueconsists of revenue recorded in connection with research and developmentefforts we perform under our various collaborative agreements, as well as ourearning of milestones, success fees and license revenue if and as our researchand development progress through our collaborators’ development processes. Netrevenue for the three months ended March 31, 2008 and 2007 is summarizedas follows:

 
| ** **                                   | ** ** | **For the three months ended March 31,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                                               | ** ** | **2007** | ** ** |
|                                         |       |                                                                   |       |   |   |
| Collaborative research revenue               |       | $                                                                      | 6,124      |   | $ | 4,199 |   |
| Milestones, success fees and license revenue |       | 80                                                                     |       | 2,150 |   |
|                                         |       | $                                                                      | 6,204      |   | $ | 6,349 |   |

 

Revenuerecognized from our collaborative relationships for the three months ended March 31,2008 and 2007, respectively was as follows:

 

| ** **         | ** ** | **For the three months ended March 31,** | ** ** |
|--------------------|------------|------------------------------------------------------------------------|------------|
| ** **         | ** ** | **2008**                                                               | ** ** | **% of  Total  Revenue** | ** ** | ** ** | **2007** | ** ** | **% of  Total  Revenue** | ** ** | ** ** | **Change** | ** ** |
|               |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Schering-Plough(1) |       | $                                                                      | 1,484      |   | 24 | % |   | $ | 2,279 |   | 36 | % |   | $ | (795 | ) |
| Cephalon           |       | 1,250                                                                  |       | 20 | % |   | 1,250 |   | 20 | % |   | — |   |
| Wyeth              |       | 1,197                                                                  |       | 19 | % |   | 1,167 |   | 18 | % |   | 30 |   |
| GSK                |       | 1,123                                                                  |       | 18 | % |   | 238 |   | 4 | % |   | 885 |   |
| BMS                |       | 1,047                                                                  |       | 17 | % |   | — |   | 0 | % |   | 1,047 |   |
| Biovitrum(2)       |       | —                                                                 |       | 0 | % |   | 1,000 |   | 16 | % |   | (1,000 | ) |
| Other              |       | 103                                                                    |       | 2 | % |   | 415 |   | 6 | % |   | (312 | ) |
| Total Revenue      |       | $                                                                      | 6,204      |   | 100 | % |   | $ | 6,349 |   | 100 | % |   | $ | (145 | ) |

 

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| (1)    |   | Revenue  from our collaborations with Schering-Plough includes net revenue of  approximately $1.5 million recognized under the 2007 Schering-Plough  Agreement during the three months ended March 31, 2008. During the three  months ended March 31, 2007, revenue from our collaborations with  Schering-Plough consisted of net revenue of approximately $0.5 million  recognized under our 2002 Collaboration and net revenue of approximately $1.8  million, including $1.0 million in milestone revenue, recognized under those  collaborations with Schering-Plough under which our research activities have  ceased. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (2)    |   | Revenue  from our Biovitrum collaborations included $1.0 million in milestone  revenue for the three months ended March 31, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

The decrease in collaborative research revenue in the three monthsended March 31, 2008 was largely due to lower milestone revenue fromSchering-Plough and Biovitrum offset by increased research revenue from ouragreements with Schering-Plough, GSK, and BMS.

 

Collaborative research and development expense includes the labor,material, equipment and allocated facilities cost of our scientific staff thatis working on collaborative partnerships. Collaborative research anddevelopment expenses increased 51% to $7.9 million in the three monthsended March 31, 2008 compared to $5.2 million in the three monthsended March 31, 2007. This increase primarily related to an increase inresources allocated to our alliances with GSK, Wyeth and Schering-Plough,specifically under our 2007 Schering-Plough Agreement, and resources allocatedto our Discovery Collaboration Agreement with BMS. This increase was offset bydecreased resources allocated to those collaborations with Schering-Plough underwhich we completed our research activities in April 2007. Share-basedcompensation costs

 

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forthe three months ended March 31, 2008 and 2007 were approximately$196 thousand and $125 thousand, respectively.

 

Proprietary research and development expense includes research anddevelopment acquisition costs, clinical trial and preclinical study costs, andlabor, material, equipment and allocated facilities cost of scientific staffworking on self-funded internal drug discovery and development programs. Ourmost advanced internal program is our DARA program. The most advanced compoundin our DARA program is our lead product candidate PS433540, which is inPhase 2 clinical trials. We licensed our DARA program from BMS in March 2006.In addition, we in-licensed our SARM program from BMS in October 2007. Themost advanced compound in our SARM program is our product candidate PS178990,which is in Phase 1 clinical development. Proprietary research anddevelopment expenses increased 18% to $8.8 million in the three monthsended March 31, 2008 compared to $7.4 million in the three monthsended March 31, 2007. This increase was primarily attributable to costsrelating to clinical trials for PS433540 offset by decreased costs expended onour CCR1 program. Share-based compensation costs for the three months ended March 31,2008 and 2007 were approximately $78 thousand and $73 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 staffand other research and development resources may be temporarily redirected fromone project to another, which redirection may also delay or impact the cost ofinternal drug discovery and development projects.

 

General and administrative expense increased by 26% to $3.4 millionin the three months ended March 31, 2008 compared to $2.7 million inthe three months ended March 31, 2007. The increase in general andadministrative expense was attributable to increased compensation, consultingand patent prosecution costs during the three months ended March 31, 2008.Share-based compensation costs for the three months ended March 31, 2008and 2007 were approximately $360 thousand and $292 thousand,respectively.

 

Interest and other income, net decreased to $643 thousand in thethree months ended March 31, 2008 compared to $696 thousand in the threemonths ended March 31, 2007. This decrease was primarily due to loweryields on our cash, cash equivalents, and marketable securities balances duringthe three months ended March 31, 2008 as compared to the three monthsended March 31, 2007. These lower yields were offset by higher cash, cashequivalents and marketable securities balances during the three months ended March 31,2008.

 

Interest expense of approximately $100 thousand was incurred inthe three months ended March 31, 2008, and related to our borrowings underour line of credit during the period. During the corresponding period in 2007,we did not have any borrowings under our credit facility.

 

Non-operating income associated with the decrease in warrant liabilitywas $1.6 million for the three months ended March 31, 2008. This decreaserepresents the change in the fair value of the warrants that were issued inconnection with our equity financing in October 2006, from December 31,2007 to March 31, 2008.  For thethree months ended March 31, 2007 non-operating expense associated withthe increase in warrant liability totaled approximately $1.7 million.  This increase 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 March 31,2007. The fair value of the warrants was determined using the Black-Scholesoption-pricing model and is remeasured at each reporting period.

 

We recorded no income tax provision for the three months ended March 31,2008 and 2007.

 

As a result of the net revenues and expenses described above, wegenerated a net loss of $11.7 million ($0.40 per basic and diluted share)in the three months ended March 31, 2008, compared to a net loss of$10.0 million ($0.50 per basic and diluted share) in the three monthsended March 31, 2007.

 

**Net Loss Outlook**

 

We have had net losses in recent years and we expect to incur losses infuture periods.  These losses areexpected to increase as compared to prior periods as a result of the increasedlevel of investment we plan to make in our internal proprietary programs in thefuture, as well as the results of those programs. Our internal proprietaryresearch and development costs are expected to continue to increase due to ourefforts to progress the DARA and SARM programs through clinical trials.

 

The amount of our net loss is highly dependent on the continued fundingand success of our research and development programs with our existingcollaborators.  The initial researchterms of our alliances with Cephalon and Wyeth are scheduled to end in

 

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June andDecember 2009, respectively. Cephalon and Wyeth represented 20% and 19%, respectively, of our totalrevenue during the three months ended March 31, 2008.  We expect to record revenue from thesealliances through the end of the initial research terms, at which time ourresearch activities under these alliances could cease.  We are uncertain whether we will seek toextend or replace these alliances. Failure to earn additional research and milestone payments under ourcurrent alliances and alliances we may seek to enter into after the end ofthese initial research terms would have a material adverse effect on ourfinancial condition and our results of operations.  If we fail to earnadequate additional research and milestone payments, we may be required tocurtail operations significantly or to obtain funds by entering into arrangementswith collaborative partners or others that may require us to relinquish rightsto certain of our technologies, products or potential markets that we would nototherwise relinquish.

 

Our adoption of SFAS 123R, which was effective January 1,2006, increased our compensation costs and will continue to have a significantimpact on our results of operations. Changes in the fair value of the warrantswe issued in October 2006 are reported in the statements of operations asincome or expense. As such, changes to the market price of our common stock orto the assumptions used in calculating the fair value of the warrants may causesignificant increases or decreases to our results of operations. However,neither the impact of share-based compensation costs, nor the impact of changesin the fair value of the warrant liability will have an impact on our cashflows.

 

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

 

**Critical Accounting Policies and Estimates**

 

The preparation of our financial statements and disclosures involve theuse of judgments and estimates. We believe the following critical accountingpolicies which we follow involve significant judgments and use estimates.

 

*RevenueRecognition*

 

Contract revenue is generally recognized either (i) on aproportional performance basis, for contracts specifying payment for servicesover a given period, or (ii) as services are performed under the agreementfor contracts specifying payment on a full-time employee basis.

 

Revenue earned related to up-front product and technology license feesis recognized in accordance with SAB 104 issued by the SEC and EITF 00-21issued by the FASB. Accordingly, amounts received under multiple-elementarrangements requiring ongoing services or performance by us are recognizedover the period of such services or performance.

 

Revenue from milestones is recognized when earned, as evidenced bywritten acknowledgement from the collaborator, provided that (i) themilestone event is substantive, its achievability was not reasonably assured atthe inception of the agreement, and we have no further performance obligationsrelating to that event, and (ii) collectibility is reasonably assured. Ifthese criteria are not met, the milestone payment is recognized over theremaining minimum period of our performance obligations under the arrangement.Royalties are recognized as earned in accordance with the terms of variousresearch and collaboration agreements.

 

*Share-basedCompensation*

 

Effective January 1, 2006, we adopted the fair value recognitionprovisions of SFAS 123R, using the modified-prospective transition method.Under SFAS 123R, we use the Black-Scholes option pricing model to estimatethe fair value of the share-based awards as of the grant date. TheBlack-Scholes model, by its design, is highly complex and dependent upon keydata inputs estimated by management. The primary data inputs with the greatestdegree of judgment are the estimated lives of the share-based awards and theestimated volatility of our stock price. The Black-Scholes model is sensitiveto changes in these two data inputs. Beginning in fiscal year 2006, wecalculated the estimated life of stock options granted using a “simplified”

 

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method,which is based on the average of the vesting term and the actual term of theoption, as a result of guidance from the SEC as contained in SAB 107permitting the initial use of this method through 2007. In December 2007,the SEC issued SAB 110, which is effective January 1, 2008,expressing the expectation that companies should be employing information frominternal or external sources about employee stock option exercise behavior whendeveloping estimates of expected term as they relate to stock optionvaluations. SAB 110 states that the SEC will continue to accept the use ofthe “simplified” method, under certain circumstances, beyond December 31,2007. We evaluated the exercise behavior of our employees for stock optionsgranted since our spin-off from Accelrys, Inc. in April 2004 anddetermined that the exercise history was an inadequate measure of the expectedterm of our stock options. Therefore, we have continued our use of the simplifiedmethod as prescribed in SAB 107. Expected stock price volatility is typicallybased on the daily historical trading data from an appropriate point in timethrough the last day of the applicable period. Because our historical tradingdata only dates back to May 3, 2004, the first trading date after ourspin-off from Accelrys, Inc., we have estimated expected volatility forthe first quarter of 2008 using an analysis of the stock price volatility ofcompanies comparable to ours in our industry.

 

*WarrantLiability*

 

We follow EITF 00-19 in accounting for our warrants which providesguidance for distinguishing between permanent equity, temporary equity andassets and liabilities. Under EITF 00-19, to qualify as permanent equity,the equity derivative must permit us to settle in unregistered shares. Undersecurities law, if the warrants were issued in connection with a publicoffering and have a cash settlement feature at the holder’s option, we do nothave the ability to settle in unregistered shares. Therefore, the warrantscannot be classified as permanent equity and are instead classified as aliability. The approximately 1,450,000 warrants that we issued as part of ourequity financing in October 2006 meet this criteria, and have beenrecorded as a liability in the accompanying balance sheets. Other warrants wehad previously issued qualify as permanent equity and do not requireremeasurement.

 

We record our warrant liabilities at fair value using a Black-Scholesoption- pricing model and remeasure at each reporting date until the warrantsare exercised or have expired. Changes in the fair value of the warrants arereported in the statements of operations as income or expense. The fair valueof the warrants could be subject to significant fluctuation based on changes inour stock price, expected volatility, expected life, the risk-free interestrate and dividend yield. The market price for our common stock has been and maycontinue to be volatile. Consequently, future fluctuations in the price of ourcommon stock may cause significant increases or decreases in the fair value ofthe warrants issued in October 2006.

 

*Long-LivedAssets*

 

We review long-lived assets, including leasehold improvements, propertyand equipment, and acquired technology rights, for impairment whenever eventsor changes in business circumstances indicate that the carrying amount of theassets may not be fully recoverable. This requires us to estimate future cashflows related to these assets. Actual results could differ from these estimates,which may affect the carrying amount of assets and the actual amortizationexpense. As of March 31, 2008, we had long-lived assets with a net bookvalue of approximately $15.0 million.

 

*Accountingfor Uncertain Tax Positions*

 

We have adopted the provisions of FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes—an interpretation of FAS Statement No. 109”(FIN 48). FIN 48 applies to all uncertain tax positions accounted forin accordance with SFAS No. 109, “Accounting for Income Taxes” and isintended to result in increased relevance and comparability in financialreporting of income taxes and to provide more information about the uncertaintyin income tax assets and liabilities. We will recognize potential interest andpenalties related to income tax positions as a component of the benefit orprovision for income taxes on the consolidated statements of operations in anyfuture periods in which we must record a liability. Because we have notrecorded a liability at December 31, 2007, there is no impact to oureffective tax rate. We do not anticipate that total unrecognized tax benefitswill significantly change during the next twelve months.

 

**New Accounting Pronouncements**

 

*Fair ValueMeasurements*

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements,” (SFAS 157). SFAS 157 establishes a framework formeasuring fair value in accordance with generally accepted accountingprinciples and expands disclosures about fair value measurements. The statement defines fair value as theexit price that would be received to sell an asset or paid to transfer aliability.   Fair value is a market-basedmeasurement that should be determined using assumptions that marketparticipants would use in pricing an asset or liability.  The statement establishes a three-levelhierarchy to prioritize

 

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the inputs used inmeasuring fair value.  The levels aredescribed in the table below with Level 1 having the highest priority and Level3 having the lowest.

 

In February 2008, the FASB issued FASB Staff Position (FSP) 157-bwhich delayed the effective date of SFAS 157 for one year for allnonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). SFAS 157 and FSP 157-b are effectivefor financial statements issued for fiscal years beginning after November 15,2007. We have elected a partial deferral of Statement 157 under the provisionsof FSP 157-b and, effective January 1, 2008, the Company adoptedSFAS 157 for those assets and liabilities that are remeasured at fairvalue on a recurring basis. Our partial adoption of SFAS 157 did not have amaterial effect on our consolidated financial statements as of and for thethree months ended March 31, 2008.

 

The following tableprovides a summary of the assets and liabilities that are measured at fairvalue on a recurring basis as of March 31, 2008.

 
| ** **                               | ** ** | ** **              | ** ** | **Basis of Fair Value Measurements** | ** **                                                                  |
|------------------------------------------|------------|-------------------------|------------|----------------------------------------------------------|-----------------------------------------------------------------------------|
| ** **                               | ** ** | **As of**               | ** ** | ** **                                               | **Quoted prices  in active  markets for  identical  assets** | ** ** | ** ** | **Significant  other  observable  inputs** | ** ** | ** ** | **Significant  unobservable  inputs** | ** ** |
| ** **                               | ** ** | **March 31, 2008** | ** ** | ** **                                               | **Level 1**                                                                 | ** ** | ** ** | **Level 2** | ** ** | ** ** | **Level 3** | ** ** |
| **Assets**                               |       |                    |       |                                                     |                                                                        |   |   |   |   |   |   |   |
| Deferred compensation plan assets        |       | $                       | 1,918      |                                                     |                                                                        | $ | 1,918 |   |   | $ | — |   |   | $ | — |   |
|                                     |       |                    |       |                                                     |                                                                        |   |   |   |   |   |   |   |
| Total assets measured at fair value      |       | 1,918                   |       |                                                     | 1,918                                                                       |   |   | — |   |   | — |   |
|                                     |       |                    |       |                                                     |                                                                        |   |   |   |   |   |   |   |
| Percentage of total assets               |       | 2                       | %          |                                                     | 2                                                                           | % |   | — |   |   | — |   |
|                                     |       |                    |       |                                                     |                                                                        |   |   |   |   |   |   |   |
| **Liabilities**                          |       |                    |       |                                                     |                                                                        |   |   |   |   |   |   |   |
| Warrant liability                        |       | $                       | 2,599      |                                                     |                                                                        | $ | — |   |   | $ | 2,599 |   |   | $ | — |   |
| Deferred compensation plan liabilities   |       | 1,918                   |       |                                                     | 1,918                                                                       |   |   | — |   |   | — |   |
|                                     |       |                    |       |                                                     |                                                                        |   |   |   |   |   |   |   |
| Total liabilities measured at fair value |       | $                       | 4,517      |                                                     |                                                                        | $ | 1,918 |   |   | $ | 2,599 |   |   | $ | — |   |
|                                     |       |                    |       |                                                     |                                                                        |   |   |   |   |   |   |   |
| Percentage of total liabilities          |       | 7                       | %          |                                                     | 3                                                                           | % |   | 4 | % |   | — |   |

 

As noted above, the fair value of the deferred compensation plan assetsand liabilities are determined using quoted market prices in active markets.The fair value of the warrant liability is determined using the Black-Scholesoption-pricing model, which uses certain significant observable inputs,including stock price (quoted market prices in active market), warrant exerciseprice (defined in warrant agreement), expected life of warrant (defined inwarrant agreement), dividend yields (determined by us), and risk-free interestrate (quoted market prices based on expected life assumption). The only inputin the Black-Scholes option-pricing model that is not readily observable is theexpected stock price volatility. Because our historical trading data only datesback to May 3, 2004, the first trading date after our spin-off fromAccelrys, we estimate our expected volatility using an analysis of the stockprice volatility of comparable companies in our industry. The fair value of thewarrant liability is subject to significant fluctuations and has ranged fromapproximately $2.6 million as of March 31, 2008 to approximately $6.1million as of March 31, 2007. These fluctuations have primarily resultedfrom fluctuations in the market price of our common stock, which ranged from$3.65 per share to $5.72 per share at our quarterly remeasurement dates since March 31,2007. Changes in the warrant liability are recorded in the statement ofoperations as income (decreases) or expense (increases).

 

*Fair ValueOption for Financial Assets and Liabilities*

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Liabilities Including an Amendment of FASB Statement No. 115”(SFAS 159). SFAS 159 permits reporting entities to choose to

 

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measureeligible financial assets or liabilities, which include marketable securitiesavailable-for-sale and equity method investments, at fair value at specifiedelection dates, or according to a pre-existing policy for specific types ofeligible items. Unrealized gains and losses for which the fair value option hasbeen elected are reported in earnings. SFAS 159 is effective for fiscalyears beginning after November 15, 2007. Our adoption of SFAS 159, whichwas effective January 1, 2008, did not have a material impact on ourconsolidated financial statements as of and for the three months ended March 31,2008.

 

*Non-Refundable Advance Payments for Goods or Servicesto Be Used in Future Research and Development Activities*

 

In June 2007, the EITF of the FASB reached a consensus on Issue No. 07-3,“Accounting for Nonrefundable Advance Payments for Goods or Services Receivedfor Use in Future Research and Development Activities” (EITF 07-3).EITF 07-3 requires that non-refundable advance payments for goods orservices that will be used or rendered for future research and developmentactivities should be deferred and capitalized. As the related goods aredelivered or the services are performed, or when the goods or services are nolonger expected to be provided, the deferred amounts would be recognized as anexpense. EITF 07-3 is effective for financial statements issued for fiscalyears beginning after December 15, 2007. Our adoption of EITF 07-3,which was effective January 1, 2008, did not have a material effect on ourconsolidated financial statements as of and for the three months ended March 31,2008.

 

**Item 3. Quantitative andQualitative Disclosures about Market Risk**

 

Our international revenue is generally denominated in United StatesDollars, and is, therefore, not exposed to changes in foreign currency exchangerates. Additionally, certain of our preclinical and clinical developmentexpenses are denominated in foreign currencies. We believe that the foreigncurrency risk arising from these expenses is minimal to these financialinstruments.

 

We do not use derivative financial instruments for trading orspeculative purposes. However, we regularly make investments in overnightrepurchase agreements that are subject to changes in short-term interest rates.We believe that the market risk arising from holding these financialinstruments is minimal.

 

Our exposure to market risks associated with changes in interest ratesrelates primarily to the increase or decrease in the amount of interest incomeearned on our investment portfolio since we have minimal debt. We ensure thesafety and preservation of invested funds by limiting default risks, marketrisk and reinvestment risk. We mitigate default risk by investing in investmentgrade securities. A hypothetical 100 basis point adverse move in interest ratesalong the entire interest rate yield curve would not have materially affectedthe fair value of our interest sensitive financial instruments at March 31,2008.

 

**Item 4. Controls and Procedures**

 

For the three months ended March 31,2008, our management carried out an evaluation, under the supervision andwith the participation of our Interim President and Chief Executive Officer andour Executive Vice President, Chief Financial Officer and Treasurer (ourprincipal financial officer and chief accounting officer), of the effectivenessof our disclosure controls and procedures pursuant to Rules 13a-15 and15d-15 under the Securities Exchange Act of 1934, or the Exchange Act, as ofthe end of the period covered by this report. Based upon this evaluation, ourInterim President and Chief Executive Officer and our Executive Vice President,Chief Financial Officer and Treasurer concluded that as of March 31, 2008, our disclosure controlsand procedures were effective to ensure that the information required to bedisclosed by us in reports filed under the Exchange Act was recorded,processed, summarized and reported within the time periods specified in the rules andforms of the SEC. Our management, including our Interim President and ChiefExecutive Officer and our Executive Vice President, Chief Financial Officer andTreasurer, does not expect that our disclosure controls or our internalcontrols will prevent all errors and all fraud. A control system, no matter howwell designed and operated, cannot provide assurance that the objectives of thecontrol system are met, and no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, within acompany have been detected.

 

Additionally, our Interim President and Chief Executive Officer and ourExecutive Vice President, Chief Financial Officer and Treasurer determined thatthere were no changes in our internal control over financial reporting duringthe three month period ended March 31,2008, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II.  OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

We are notcurrently a party to any legal proceedings the negative outcome of which wouldhave a material adverse effect on our business, financial condition or resultsof operations.

 

**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, 2007. Except asnoted below, there have been no material changes to the risk factors disclosedin the Form 10-K.

 

**RISKS RELATED TO OUR BUSINESS AND INDUSTRY**

 

***If we consume cash more quickly thanexpected, and if we are unable to raise additional capital, we may be forced tocurtail operations.***

 

As of March 31, 2008, we had cash and cash equivalents ofapproximately $61.5 million. In addition, as of March 31, 2008, wehad deferred revenue of approximately $48.5 million relating to researchand development activities that are to be performed by us subsequent to March 31,2008. Our cash used in operating activities for the quarter ended March 31,2008 was approximately $8.8 million, which included $5.0 million inresearch finding we received from GSK. Absent the receipt of the $5.0 million from GSK our net cash usedin operating activities would have been approximately $13.8 million.  As the clinical programs we are developingprogress, we expect this amount to increase in the future. Clinical andpreclinical development of drug candidates is a long, expensive and uncertainprocess that requires us to raise funds from time to time to support ourinternal development programs. We expect to raise funds from one or acombination of approaches, which could include public and/or private financing,sale and/or partnering of one or more of our internal programs, and partneringof our internal drug discovery capabilities. Capital could be raised through public or private financings involvingdebt or common stock or other classes of our equity. Additional issuances ofequity securities will further dilute our stockholders’ percentage ownership.

 

We believe that our capital resources will be adequate to fund ouroperations at their current levels at least through March 31, 2009.However, changes may occur that would cause us to consume available capitalresources before that time. Examples of relevant potential changes that couldimpact our capital resources include:

 
| · |   | the  costs associated with our drug research and development activities, including  the costs associated with our Phase 2 and Phase 1 clinical  development programs for our product candidates PS433540 and PS178990 and  additional costs we may incur if our development programs are delayed or are  more expensive to implement than we currently anticipate; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| · |   | changes  in existing collaborative relationships, including the funding we receive in  connection with those relationships;                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| · |   | the  progress of our milestone and royalty producing activities;                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| · |   | acquisitions  of other businesses or technologies;                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| · |   | the  purchase of additional capital equipment;                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| · |   | cash  refunds we may be required to make to GSK if, prior to March 24, 2011,  we exercise our discretionary termination right under the GSK Agreement;                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| · |   | cash  payments we may be required to make to Schering-Plough relating to a  termination fee if, prior to August 2010, we exercise our discretionary  termination right under the 2007 Schering-Plough Agreement;                                                                                                                                                        |

 

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| · |   | cash  payments we may be required to make to BMS if we fail to deliver certain  compound libraries under the DARA License Agreement;                    |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                    |
| · |   | competing  technological and market developments; and                                                                                                   |
|   |   |                                                                                                                                                    |
| · |   | the  cost of filing, prosecuting, defending and enforcing patent claims and other  intellectual property rights, and the outcome of related litigation. |

 

Failure to earn additional research and milestone payments under our existingalliances and alliances we may seek to enter into after the end of the initialresearch terms of our alliances with Cephalon and Wyeth would have a materialadverse effect on our business as it is currently conducted, our financialcondition and our results of operations.  If we fail to earn adequateadditional research and milestone payments, we may be required to curtailoperations significantly or to obtain funds by entering into arrangements withcollaborative partners or others that may require us to relinquish rights tocertain of our technologies, products or potential markets that we would nototherwise relinquish.

 

As of May 2, 2008, there were approximately 4,754,000 stockoptions outstanding granted under our various equity compensation plans andapproximately 1,626,000 warrants outstanding, which includes approximately176,000 warrants issued in connection with the GSK Agreement and approximately1,450,000 warrants issued in connection with our October 2006 financingtransaction. These equity instruments represent approximately 21% of our sharesoutstanding at May 2, 2008. The significant dilution represented by ouroutstanding warrants and equity compensation awards may make it more difficultfor us to raise additional capital.

 

Additional capital may not be available on favorable terms, or at all.We may curtail operations, perhaps significantly.  If adequate funds are not available, we mayobtain funds by entering into arrangements with partners or others that mayrequire us to relinquish rights to certain of our technologies, products orpotential markets that we would not otherwise relinquish.

 

***Because PS433540 is in Phase 2clinical development and PS178990 is in Phase 1 clinical development,there is a high risk that further development and testing will demonstrate thatneither compound is suitable for commercialization. In addition, because weexclusively licensed each of PS433540 and PS178990 from BMS, any dispute withBMS may adversely affect our ability to develop and commercialize those productcandidates.***

 

We have no products that have received regulatory approval forcommercial sale. PS433540 is in Phase 2 clinical development and PS178990is in Phase 1 clinical development. We face the substantial risks offailure inherent in developing drugs based on new technologies.

 

Both PS433540 and PS178990 must satisfy rigorous standards of safetyand efficacy before the FDA and foreign regulatory authorities will approveeither product candidate for commercial use. Phase 1 clinical trials withPS178990 may not demonstrate that the product candidate is sufficiently safe towarrant our continued development of it, and Phase 2 clinical trials withPS433540 may not demonstrate that it is safe or efficacious with respect to theclinical indications for which we seek to develop it. We will need to conductsignificant additional clinical trials to demonstrate the safety and efficacyof PS433540 and PS178990 to the satisfaction of the FDA and foreign regulatoryauthorities to obtain product approval.

 

Clinical development is a long, expensive and uncertain process. It maytake us many years to complete clinical trials, and failure can occur at anystage of trials. Success in preclinical testing and early clinical trials doesnot ensure that later clinical trials will be successful. We may suffersignificant setbacks in advanced clinical trials, even after promising resultsin earlier trials. We may not be able to enroll a sufficient number of patientsto complete our clinical trials in a timely manner. Based on results at anystage of preclinical testing or clinical trials, we may decide to discontinuedevelopment of PS433540 and PS178990.

 

We do not know whether any future clinical trials of PS433540 orPS178990 will demonstrate sufficient safety and efficacy necessary to obtainthe requisite regulatory approvals or will result in marketable products. Ourfailure to adequately demonstrate the safety and efficacy of PS433540 orPS178990 in their respective development programs will prevent receipt of FDAand foreign regulatory approvals and, ultimately, commercialization.

 

If there is any dispute between us and BMS regarding our rights underthe DARA License Agreement, our ability to develop and commercialize PS433540may be adversely affected. Any loss of our rights from BMS could delay orcompletely terminate our product development efforts for PS433540 and otherDARA compounds licensed from BMS.

 

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Similarly,if there is any dispute between us and BMS regarding our rights under the SARMLicense Agreement and/or performance under the Discovery CollaborationAgreement, our ability to develop and commercialize PS178990 may be adverselyaffected. Any loss of our rights from BMS could delay or completely terminateour product development efforts for PS178990 and other SARM compounds licensedfrom BMS.

 

***Our development of PS433540 may beadversely impacted if our clinical trials show certain adverse effects reportedby other companies in connection with clinical trials of their ERA and ARBproduct candidates.***

 

Abnormal liver function test (LFT) results, which are indicative of potentialliver toxicity, have been reported by other companies as complications in theirclinical trials of ERA product candidates. Approval of PS433540 may be delayedor ultimately blocked by such concerns. If the results of any of our PS433540clinical trials indicate abnormal LFTs, we may not receive regulatory approvalto market the product candidate and our product candidate, if approved formarketing, may not be able to compete with other products. There can be noassurance that the lack of LFT abnormalities seen with respect to PS433540prior to now will be confirmed by subsequent clinical trial results.

 

As developed by other companies, ERAs have been teratogenic in animals.If approved for marketing, we assume that PS433450 will be subject to a blackbox warning regarding teratogenicity and therefore may not be able to competewith other products that do not have a similar warning.

 

Prior clinical trials by other companies have also indicated that theERA therapeutic class may cause peripheral edema (fluid retention) in somepatients. Consequently, PS433540 may not be successfully developed as atreatment for heart failure or for use in patients at risk for heart failureand may therefore have a more limited market potential than antihypertensivesthat are approved for the treatment of heart failure.

 

***Our development of PS178990 may beadversely impacted if our clinical trials show certain adverse effects reportedin connection with testosterone and other anabolic steroids.***

 

Testosterone and other anabolic steroids may cause serious unwantedside effects, including liver toxicity, stimulation of prostate cancer growthin men and masculinization in women. Approval of PS178990 may be delayed orultimately blocked by such concerns. If the results of any of our PS178990clinical trials indicate such stimulation of prostate cancer growth, we may notreceive regulatory approval to market the product candidate and our productcandidate, if approved for marketing, may not be able to compete with otherproducts.

 

***We had net losses in recent years and our future profitability isuncertain.***

 

During the quarter ended March 31, 2008, we had a net loss ofapproximately $11.7 million. In addition, during the year ended December 31,2007, we had a net loss of approximately $47.9 million. The net losses forthese periods was primarily due to costs incurred in our internal productdevelopment efforts, including the costs of developing PS433540, which iscurrently in Phase 2 clinical trials, and the research and development ofour other internal programs. The net loss for the year ended December 31,2007 also included a non-cash charge of $9.2 million to proprietaryresearch and development expense related to the acquisition of our SARMprogram,.

 

We expect to incur losses in future periods and these losses areexpected to increase as compared to prior periods as a result of the increasedlevel of investment we plan to make in our internal programs, including ourDARA program and our SARM program, in the future.

 

Our adoption of SFAS 123R, which was effective January 1, 2006,increased our compensation costs and will continue to have a significant impacton our results of operations. In addition, under EITF 00-19, the accountingtreatment of the warrants that we issued in our October 2006 equityfinancing may have a significant impact on our results of operations, dependingon the volatility of the market price of our common stock and the assumptionsused in calculating the fair value of the warrants.

 

On a quarterly basis, our future operating results are likely to behighly volatile depending upon our receipt, if any, of milestone payments fromour collaborators. We may not receive milestone payments on a regular basis orat all. Our ability to achieve profitability, if ever, will be significantlyimpacted by the level of investment we plan to make in our internal proprietaryprograms in the future, as well as the results of those programs.

 

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Continuing net losses may limit our ability to fund our operations andwe may not generate income from operations in the future.

 

***If third parties do not manufacturePS433540 in sufficient quantities and at an acceptable cost, clinicaldevelopment of PS433540 would be delayed.***

 

We do not currently own or operate manufacturing facilities, and werely, and expect to continue to rely, on third parties for the production ofclinical quantities of our product candidates. Our current and anticipatedfuture dependence upon others for the manufacture of our product candidates mayadversely affect our future profit margins and our ability to develop productcandidates and commercialize any product candidates on a timely and competitivebasis.

 

We have relied on third party vendors for the manufacture of clinicalquantities of PS433540, and we are currently assessing our manufacturing needsfor additional clinical trial supply of PS433540 as we review our clinicalstrategy for PS433540. We will evaluate whether to continue to rely on themanufacturing capabilities of our current third party vendors or whether someor all of the manufacturing process should be transferred to other contractmanufacturers as we plan for our additional clinical trials. If our currentsupply of PS433540 becomes unusable, if our PS433540 supply is not sufficientto complete our clinical trials, or if we are unsuccessful in identifying acontract manufacturer or negotiating a manufacturing agreement on a timelybasis for our additional clinical trials, we could experience a delay inreceiving an adequate supply of PS433540.

 

We may not be able to maintain or renew our existing or any otherthird-party manufacturing arrangements on acceptable terms, if at all. If weare unable to continue relationships for PS433540, or to do so at an acceptablecost, or if these or other suppliers fail to meet our requirements for PS433540for any reason, we would be required to obtain alternate suppliers. Anyinability to obtain alternate suppliers, including an inability to obtainapproval from the FDA of an alternate supplier, would delay or prevent theclinical development of these product candidates.

 

***Failure to attract and retain skilled personnel, including apermanent chief executive officer, could materially and adversely affect us.***

 

We are a small company,and our success depends in part on the continued service of key management andscientific personnel and our ability to identify, hire and retain additionalpersonnel.  Our former president andchief executive officer resigned effective April 9, 2008.  We are currently engaged in a search for hissuccessor, and the Chairman of our Board of Directors is serving as our InterimPresident and Chief Executive Officer while we undertake that search.  Failure to identify and hire a permanentsuccessor to our former president and chief executive officer could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

There is intensecompetition for qualified personnel. Immigration laws may further restrict our ability to attract or hirequalified personnel. We may not be able to continue to attract and retain thepersonnel necessary for our growth and development. Further, we are highlydependent on the principal members of our scientific and management staff. Oneor more of these key employees could leave our employ within the foreseeablefuture and the loss of any of these people could have a material adverse effecton our business, financial condition and results of operations. We do not, anddo not intend to, maintain key person life insurance on the life of anyemployee.

 

**Item 2.****   ****UnregisteredSales of Equity Securities and Use of Proceeds**

 

**None.**

** **

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

 

None.

 

**Item 4.****   ****Submissionof Matters to a Vote of Security Holders**

 

None.

 

**Item 5.****   ****OtherInformation**

** **

 

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OnMay 8, 2008, the Company entered into a Separation Agreement and GeneralRelease with its former President and Chief Executive Officer, Leslie J.Browne, Ph.D.  In connection with theseparation agreement, the Company expects to record a charge in the threemonths ending June 30, 2008 of approximately $0.9 million. Under the terms of the separationagreement, Dr. Browne’s employment with the Company terminated as of theclose of business on April 9, 2008. The separation agreement provides that Dr. Browne will be entitledto (1) a lump sum separation payment of $810,261, (2) a lump sumbonus payment of $67,479 and (3) continuation of group medical and dentalcoverage until twenty-four months following the separation date.  The Company is required to make the lump sumseparation payments within thirty days of May 8, 2008.  The separation agreement includes a releaseof claims by Dr. Browne and a covenant not to sue by Dr. Browne. For a two year period after the separation date, the separation agreementrestricts the ability of Dr. Browne to compete with the Company, cause anyperson to not do business with the Company or solicit for employment a currentemployee or consultant of the Company.

 

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**Item 6.****   ****Exhibits**

 
| **Exhibits.** | ** ** | ** **                                                                                                                                                                                                                                                                         |
|---------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **    | ** ** | ** **                                                                                                                                                                                                                                                                         |
| 10.1          |       | Separation  Agreement and General Release, dated May 8, 2008, between  Pharmacopeia, Inc. and Leslie Johnston Browne, Ph.D. (1)(2)                                                                                                                                       |
|          |       |                                                                                                                                                                                                                                                                               |
| 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)             Filedherewith.

(2)             Compensationplan or arrangement in which directors and executive officers are eligible toparticipate.

 

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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:  May 8,  2008 |   | By:                 | /s/ Joseph A.  Mollica, Ph.D. |
|                               |   |                | Joseph A.  Mollica, Ph.D. |
|                               |   |                | Chairman of the  Board and Interim President and Chief  Executive Officer |
|                               |   |                |
|                               |   |                | (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          |       | Separation  Agreement and General Release, dated May 8, 2008, between  Pharmacopeia, Inc. and Leslie Johnston Browne, Ph.D. (1)(2)                                                                                                                                        |
|          |       |                                                                                                                                                                                                                                                                                |
| 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)          Filedherewith.

(2)             Compensationplan or arrangement in which directors and executive officers are eligible toparticipate.

 

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