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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K/A

(Amendment No. 1)

(Mark One)

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

For the fiscal year ended December 31, 2009

Or



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

For the transition period from              to

Commission file number: 001-33438





NEUROGESX, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 94-3307935                             
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification Number)

2215 Bridgepointe Parkway,
Suite 200

San Mateo, CA 94404

(650) 358-3300

(Address, including zip code, of registrants
principal executive offices and telephone number, including area code)

Securities registered pursuant to
Section 12(b) of the Act:

Common Stock, $0.001 par value

Securities registered pursuant to Section 12(g) of the Act:

None





Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ̈    No  x

Indicate by check mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act.    Yes   ̈    No  x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   ̈    No    ̈

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  x

Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):



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

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates was $74.7 million computed by reference
to the last sales price of $6.63 as reported by the NASDAQ Global Market, as of the last business day of the Registrants most recently completed second fiscal quarter, June 30, 2010. This calculation does not reflect a determination that
certain persons are affiliates of the Registrant for any other purpose.

The number of shares outstanding of the
Registrants common stock on December 31, 2010 was 17,869,108 shares.





DOCUMENTS
INCORPORATED BY REFERENCE

Portions of the Registrants Proxy Statement for its 2010 Annual Meeting of Stockholders
(the Proxy Statement), to be filed with the Securities and Exchange Commission, are incorporated by reference to Part III of this Annual Report on Form 10-K.









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EXPLANATORY NOTE

Neurogesx,, Inc. (Neurogesx, the Company, we, us, or our) is filing this
Amendment No. 1 on Form 10-K/A (Amendment) to its Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on March 19, 2010 (Form 10-K).

We are filing this Amendment to re-file the complete text of those items for which we have included supplemental information,
as follows:



| |  |  | Part I, Item 1, Business: the sub-section of Our Strategy entitled Obtain broader market access through expansion of approved
indications has been supplemented with additional information about our NGX-1998 product candidate;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Part I, Item 1, Business: the section entitled Patents and Proprietary Technology has been supplemented with additional information
about our patents;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations: the section entitled Results of
Operations has been supplemented with additional information about our research and development expenses;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Part III, Item 11, Executive Compensation: the sub-sections of Compensation Discussion and Analysis entitled Benchmarking of
Elements of Compensation, Compensation Components  Base Compensation,Compensation Components  Bonus Compensation, and Compensation Components  Equity Compensationhave
been supplemented with additional information.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This Amendment contains currently dated certifications of
our Chief Executive Officer and Chief Financial Officer.

This Amendment does not reflect events occurring after the filing of
the Form 10-K, or after the filing of the definitive Proxy Statement for our 2010 Annual Meeting of Stockholders, as filed with the Securities and Exchange Commission on May 3, 2010 (the Proxy Statement), and does not update
disclosures contained in either the Form 10-K or Proxy Statement, or modify or amend the Form 10-K or Proxy Statement except as specifically described in this explanatory note.



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NEUROGESX, INC.

FORM 10-K/A

Year Ended December 31, 2009

Amendment No. 1

INDEX



|             |  |                                                                                       |  |      |    | 
|------------ |  | ------------------------------------------------------------------------------------- |  | ---- | -- | 
|             |  |                                                                                       |  | Page |   
|PART I       |  |                                                                                       |  |      | 1  | 
|ITEM 1.      |  | BUSINESS                                                                              |  |      | 2  | 
|             |  |                                                                                      
|PART II      |  |                                                                                       |  |      | 25 | 
|ITEM 7.      |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  |      | 25 | 
|             |  |                                                                                      
|PART III     |  |                                                                                       |  |      | 36 | 
|ITEM 11.     |  | EXECUTIVE COMPENSATION                                                                |  |      | 36 | 
|             |  |                                                                                      
|PART IV      |  |                                                                                       |  |      | 56 | 
|ITEM 15.     |  | Exhibits and Financial Statement Schedules                                            |  |      | 56 | 
|             |  |                                                                                      
|EXHIBIT 31.1 |  |                                                                                       |  |      |    | 
|EXHIBIT 31.2 |  |                                                                                       |  |      |    | 
|EXHIBIT 32.1 |  |                                                                                       |  |      |    | 



-i-



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PART I

This report contains forward-looking statements that are based upon current expectations within the meaning of the Private Securities
Reform Act of 1995. We intend that such statements be protected by the safe harbor created thereby. Forward-looking statements involve risks and uncertainties and our actual results and the timing of events may differ significantly from those
results discussed in the forward-looking statements. Examples of such forward-looking statements include, but are not limited to, statements about or relating to:



| |  |  | Our plans with regard to the commercialization of Qutenza® in the United States and the plans of Astellas Pharma Europe Ltd., or Astellas for commercialization of Qutenza pursuant to the terms of the Distribution, Marketing
Agreement and License Agreement or the Astellas Agreement;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the sufficiency of existing resources to fund our operations beyond December 31, 2010;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | capital requirements and our needs for additional financing;
| | - |  | ------------------------------------------------------------



| |  |  | efforts to expand the scope of indications in which our capsaicin-based product candidates are approved, and the timing of potential clinical trials in
connection with such expansion;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | plans to obtain broader market access for our capsaicin-based product candidates through expansion of approved indications;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | the scope and size of research and development efforts and programs, including with respect to development of additional product candidates;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | efforts to identify and qualify second source of supply and manufacturing sites;
| | - |  | --------------------------------------------------------------------------------



| |  |  | our proposed distribution and sales strategies including our plans for sales, marketing and manufacturing;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | anticipated development of NGX-1998 and other potential product candidates;
| | - |  | ---------------------------------------------------------------------------



| |  |  | the potential benefits of, and markets for, our product candidates;
| | - |  | -------------------------------------------------------------------



| |  |  | losses, costs, expenses, expenditures and cash flows;
| | - |  | -----------------------------------------------------



| |  |  | potential competitors and competitive products;
| | - |  | -----------------------------------------------



| |  |  | our plans for sales, marketing and manufacturing;
| | - |  | -------------------------------------------------



| |  |  | future payments under lease obligations and equipment financing lines;
| | - |  | ----------------------------------------------------------------------



| |  |  | patents and our and others intellectual property; and
| | - |  | ------------------------------------------------------



| |  |  | expected future sources of revenue and capital.
| | - |  | -----------------------------------------------



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We undertake no obligation to, and expressly disclaim any obligation to, revise or update
the forward-looking statements made herein or the risk factors, whether as a result of new information, future events or otherwise. Forward-looking statements involve risks and uncertainties, which are more fully discussed in the Risk
Factors section and elsewhere in this Annual Report, including, but not limited to, those risks and uncertainties relating to:



| |  |  | physician or patient reluctance to use Qutenza or payer coverage for Qutenza and for the procedure to administer it, which may impact physician
utilization of Qutenza;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our inability to obtain additional financing if necessary;
| | - |  | ----------------------------------------------------------



| |  |  | changing standards of care and the introduction of products by competitors or alternative therapies for the treatment of indications we target;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties or delays in development, testing, obtaining regulatory approval for, and undertaking production and marketing of our drug candidates;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the uncertainty of protection for our intellectual property, through patents, trade secrets or otherwise; and
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | potential infringement of the intellectual property rights or trade secrets of third parties.
| | - |  | ---------------------------------------------------------------------------------------------

When used in this Annual Report, unless otherwise indicated, NeurogesX, the Company, we,
our and us refers to NeurogesX, Inc. and its subsidiaries.

Qutenza® and Neurogesx are, respectively, registered and applied for trademarks in the United States. We have also
applied for these trademarks in several other countries. Other service marks, trademarks and trade names referred to in this Annual Report on Form 10-K are the property of their respective owners.



|Item 1. | Business
|------- | --------

Overview

We are a biopharmaceutical company focused on developing and commercializing novel pain management therapies. We are
assembling a portfolio of pain management product candidates based on known chemical entities to develop innovative new therapies that we believe may offer substantial advantages over currently available treatment options. Our initial focus is on
the management of chronic peripheral neuropathic pain conditions.

Our first commercial product, Qutenza, the first
prescription strength capsaicin product is a dermal delivery system designed to treat certain neuropathic pain conditions and was approved by the U.S, Food and Drug Administration, or FDA in November 2009 for the management of neuropathic pain
associated with postherpetic neuralgia, or PHN. We are currently preparing to commercialize Qutenza in the United States with our own sales force and we believe that Qutenza will be commercially available in the United States in the first half of
2010.

In May 2009, Qutenza received a marketing authorization or MA, in the European Union for the treatment of peripheral
neuropathic pain in non-diabetic adults, either alone or in combination with other medicinal products for pain. In June 2009, we entered into the Astellas Agreement, with Astellas under which Astellas was granted an exclusive license to
commercialize Qutenza in the European Economic Area, which includes the 27 countries of the European Union, Iceland, Norway, and Liechtenstein as well as Switzerland, certain countries in Eastern Europe, the Middle East and Africa or the Licensed
Territory. Astellas has advised us that it is their goal to launch Qutenza as soon as possible, with the aim to make Qutenza available in as many of the E.U. markets as possible before the end of 2010. It is anticipated that selected countries will
make Qutenza available in the coming weeks following the date of this filing.



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We are currently evaluating the nature, scope and timing of continued development of Qutenza
to support the potential for label expansion in the United States. Areas of potential focus for label expansion include HIV-distal sensory neuropathy, or HIV-DSP, also known as HIV-associated neuropathy, or HIV-AN, painful diabetic neuropathy, or
PDN, and potentially other neuropathic pain indications. Our plans for continued Qutenza development efforts are being evaluated in light of Astellas plans for market support studies and satisfaction of the European Medicines Agency, or EMEA,
post-approval regulatory commitments. In addition to potential continued development of Qutenza, we have an early stage development pipeline which consists of:



| |  |  | NGX-1998, a topical liquid formulation of capsaicin for potential use in neuropathic pain conditions;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | NGX-1576, NGX-9674 and NGX-5752, prodrugs of acetaminophen for potential use in acute pain, including traumatic pain, post-surgical pain and fever; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | NGX-6052, an opioid prodrug for potential use in chronic pain indications.
| | - |  | --------------------------------------------------------------------------

NGX-1998 has been evaluated in three Phase 1 studies and we currently anticipate re-initiating our development of this product candidate
in 2010. The other product candidates are in the pre-clinical stage of development and may or may not be the subject of further development in 2010 or beyond. Further, we are currently seeking development partners for our acetaminophen and opioid
prodrug product candidates. We hold commercial rights, with the exception of rights given to Astellas, to all of our product candidates and are actively engaged in discussions with potential commercial partners.

Our Strategy

Our goal
is to become a leading biopharmaceutical company focused on the development and commercialization of novel pain management therapies. Key elements of our strategy for achieving this goal include:

Maximize the value of Qutenza through an effective commercial launch in the United States and European Union. Our objective is to
launch Qutenza in the United States in the first half of 2010 through our own, dedicated sales force. We also plan to seek the greatest long term commercial potential of Qutenza through intensive selling efforts that train physicians and their
office staff in the application of Qutenza and other important elements of the treatment such as managing a patients ability to tolerate a Qutenza treatment and support in obtaining reimbursement. As a result of this selling approach, our
selling efforts will be focused initially on thought leaders in neuropathic pain as well as U.S. pain specialists with a significant practice in treating PHN patients. Once Qutenza is established in these top pain treatment centers, we expect to
expand our efforts to a broader array of physicians who treat PHN patients. In Europe, the Middle East and Africa, we have established a commercial partnership with Astellas. Astellas has advised us that it is their goal to launch Qutenza as soon as
possible, with the aim to make Qutenza available in as many of the E.U. markets as possible before the end of 2010. It is anticipated that selected countries will make Qutenza available in the coming weeks following the date of this filing.

Obtain an appropriate product reimbursement model for Qutenza. Qutenza is a dermal delivery system containing
prescription strength capsaicin. Because of the potential for inappropriate use, inadvertent exposure and for the need for medical supervision, FDA labeling in the United States requires that Qutenza be applied by a physician, or by a health care
professional under the direct supervision of a physician. As a result, we believe that Qutenza may be eligible for reimbursement under Medicare Part B. Medicare Part B reimbursement would provide for reimbursement of both Qutenza and the time
incurred by the healthcare professional for the treatment under reimbursement codes that would be issued by the Centers for Medicare and Medicaid Services, or CMS, and the American Medical Association. We have developed strategies which may enable
the reimbursement of Qutenza under Medicares prescription drug benefit (Part D), if reimbursement under Medicare Part B proves unavailable. We believe that obtaining appropriate reimbursement for Qutenza and the related application procedure,
in combination with an appropriate sales and distribution model, will be important to the market success of Qutenza.



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Obtain broader market access through expansion of approved indications.We plan to
continue to develop our capsaicin-based product candidates to address indications beyond currently labeled indications. Such development may be carried out through further development of Qutenza or through development of NGX-1998 and may include
development efforts conducted by us, or in conjunction with development efforts by Astellas. To date, we have conducted two Phase 3 studies of Qutenza in HIV-DSP, one of which met its primary endpoint. In addition, we have conducted a Phase 2
open-label study of Qutenza that included patients with PDN. In the United States, we believe that the FDA requires that we conduct two positive Phase 3 studies for each neuropathic pain indication for which we are seeking approval. Therefore, label
expansion of Qutenza in the United States could require at least one additional successful Phase 3 study in HIV-DSP and potentially two successful Phase 3 studies in PDN. We have not determined whether we will pursue additional clinical trials of
Qutenza in HIV-DSP. We intend to seek guidance from the FDA with regard to the potential approval of Qutenza for the treatment of pain associated with HIV-DSP and what additional clinical trials may be required, if any. Based upon such information,
we intend to ascertain the advisability of proceeding with the development of Qutenza in such indication. In Europe, label expansion could require only one safety and efficacy study in PDN. Under the Astellas Agreement, Astellas will conduct and pay
for development work required in support of regulatory requirements in the Astellas Territory, including EMEA post market commitments. NGX-1998, a liquid formulation which uses the same active ingredient as in Qutenza, is also being developed for
the treatment of neuropathic pain conditions and may be developed to address indications beyond Qutenzas currently labeled indications.

Expand our product portfolio. Our model is to develop innovative therapies based on known chemical entities, balancing market opportunity with a favorable clinical and regulatory pathway. We have
begun to expand our product candidate pipeline through the pre-clinical evaluation of our acetaminophen and opioid pro-drug candidates. Further, we may expand our product candidate pipeline through in-license or acquisition of product candidates.
The expansion of our product candidate pipeline may be important to our continued success. As we intend to commercialize Qutenza with our own sales force, we believe an opportunity may exist to leverage that commercial presence through in-license or
co-promotion of additional commercial products. Leveraging our sales force is a longer term strategic objective.

Qutenza

Qutenza is a non-narcotic analgesic formulated in a localized treatment patch containing an 8% concentration of synthetic capsaicin.
Capsaicin is released from the patch and, with the aid of penetration enhancers, penetrates into the skin during application without significant absorption of capsaicin into the bloodstream. Accordingly, we believe that users of Qutenza are unlikely
to experience the common central nervous system side effects of systemically administered drugs used to treat neuropathic pain such as anti-convulsants, anti-depressants and opioids and the potential for abuse and addiction associated with some of
these drugs. Qutenza is administered by a physician or by a health care professional under the direct supervision of a physician in a non-invasive process that involves pre-treating the painful area with a topical anesthetic, followed by the
application of Qutenza. Patches are cut to conform to the area to be treated. After the specified application period (60 minutes for PHN), the patch is removed and residual capsaicin is removed from the skin with a proprietary cleansing gel. Qutenza
has been shown to provide a clinically meaningful reduction in peripheral neuropathic pain for up to 12 weeks in certain of our clinical studies. In clinical trials, the most common adverse reactions were application site redness, pain, itching
and papules. The majority of these reactions were transient and self limited. Serious adverse reactions included application site pain and increased blood pressure. Blood pressure increases during or shortly after Qutenza treatment were on average
less than 10 mm Hg, although some patients had greater increases and these changes lasted for approximately2 hours after patch removal.

Qutenza can be used alone or in conjunction with other pain medications and as such may have place as first line or additive therapy.



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Qutenza has been approved by the FDA for the management of neuropathic pain associated with
PHN and is the first prescription strength product containing capsaicin, Qutenzas active ingredient. Qutenza has also been approved in the European Union for the treatment of peripheral neuropathic pain in non-diabetic adults, either alone or
in combination with other medicinal products for pain.

Neuropathic Pain

Pain results from sensory nerve stimulation often associated with actual or potential tissue damage. Pain is transmitted by specific nerve
fibers that carry the pain signal across the nervous system to the brain, where it is recognized as pain. Pain can be acute or chronic. Acute pain is short in duration and tends to be reactive or protective against actual or potential tissue injury.
Chronic pain lasts over an extended period of time and often serves no useful purpose. There are two broad categories of chronic pain, inflammatory and neuropathic. Inflammatory pain is associated with tissue damage, often occurring from injury or
from inflammatory conditions, such as osteoarthritis or lower back pain. This class of pain is often treated with prescription drugs that act systemically, including opioids, and over-the-counter anti-inflammatory drugs.

Neuropathic pain is a type of chronic pain that results from injury to, or dysfunction of, nerves. The injury can be to the central
nervous system, consisting of the brain and spinal cord, or to the peripheral nervous system, consisting of all other nerves. Neuropathic pain can occur in any part of the body and can significantly impair the affected individuals quality of
life. It can result from viruses, as is the case with PHN and HIV, or diseases, such as diabetes. Neuropathic pain can also result from the use of drugs that treat viruses or other diseases, such as drugs used to treat HIV or cancer.

Postherpetic Neuralgia

PHN is a painful condition affecting sensory nerve fibers. It is a complication of shingles, a second outbreak of the varicella-zoster virus, which initially causes chickenpox. Following an initial
infection, some of the virus can remain dormant in nerve cells. Years later, age, illness, stress, medications or other factors that are not well understood can lead to reactivation of the virus. The rash and blisters associated with shingles
usually heal within about six weeks, but some people continue to experience pain for years thereafter. This pain is known as postherpetic neuralgia, or PHN. PHN may occur in almost any area, but is especially common on the torso.

According to the Centers for Disease Control, or CDC, there are approximately 1.0 million cases of shingles in the United States
each year, and approximately one in five shingles sufferers go on to develop PHN. The likelihood of developing PHN from shingles increases with age, with approximately 25% of people over 55, 50% of people over 60, and 75% of people over 70 estimated
to eventually develop PHN after contracting shingles. Estimates of the number of people suffering from PHN in the United States range from under 200,000 to 500,000. We have been granted an orphan designation for PHN by the FDAs Office of
Orphan Products Development.

Capsaicin-Induced Effects on Peripheral Neuropathic Pain

Capsaicin is a naturally occurring substance that is responsible for making chili peppers hot. Products containing low concentrations of
capsaicin, including creams, lotions and patches, have long been sold over-the-counter for the treatment of minor arthritis, back and muscle pain, as well as for other conditions.

Low-concentration capsaicin topical products have not been a viable treatment for chronic peripheral neuropathic pain conditions due in
part to poor patient compliance resulting from the treatment of already painful skin with a compound that causes burning sensations, as well as the inconvenience of multiple daily applications. To address the intrinsic limitations of existing, over
the counter capsaicin therapies, we have developed Qutenza and are developing NGX-1998, utilizing prescription strength capsaicin.



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Existing Treatments and their Limitations

While there are a number of products currently available for the management of neuropathic pain in general and PHN specifically, we
believe that the market is still underserved due to the limitations of current therapies. The primary limitations of current therapies relate to their unwanted systemic side effects, cumbersome treatment regimens, potential for abuse and drug-drug
interaction.

Because patients react to pain and to pain therapies in many ways and because no one therapy offers complete
pain relief to all patients without significant side effects, a single standard of care does not exist for the management of neuropathic pain. Initial systemic treatment typically involves one of a few anti-convulsants or anti-depressants. To the
extent that the initial therapy does not provide adequate pain relief, the physician may try other anti-convulsants, anti-depressants or opioids alone or in combination, to treat the pain. These systemic treatments are often limited by side effects
including dizziness, sedation, confusion, constipation and the potential for drug dependence. Due to these side effects, patient compliance is often poor and physicians often reduce dosing to less than optimal levels which limits the ability of
these drugs to reduce pain. Additionally, topical analgesics have limited efficacy and cumbersome treatment regimens. For these reasons, we believe there is an opportunity for localized, non-systemic analgesics to be used broadly either alone or in
combination with other pain medications to reduce the patients pain.

Commercialization of Qutenza

United States

We are currently preparing to commercialize Qutenza in the United States. Initially, we anticipate that Qutenza will be commercialized in the United States with our own sales force comprising
approximately 40 sales representatives and sales management personnel in three territories. The field sales force is expected to focus initially on thought leaders in neuropathic pain as well as U.S. pain specialists with a significant practice in
treating PHN patients. We plan to initially focus our sales force on the approximately 2,000  3,000 physicians who specialize in treating pain. These include pain specialists, neurologists, anesthesiologists, and specialists in physical
medicine and rehabilitation, among others. In addition, we plan to focus on pain centers, clinics and hospital outpatient facilities that we believe have the physical space available to accommodate the Qutenza treatment. Once Qutenza is established
in these top pain treatment centers, we expect to expand our efforts to a broader array of physicians who treat PHN patients. Our field sales force is expected to be aided by a commercial team consisting of reimbursement and commercial payer
specialists in addition to non-field based support personnel. Areas of the country that are harder to cover with our targeted sales efforts are planned to be supported through other programs.

We believe that timely and informative training of physicians and their office personnel in the effective and efficient use of Qutenza is
a critical success factor for the launch of Qutenza in the United States. To promote physician knowledge in both the techniques to apply the Qutenza patch and in helping patients to tolerate the potential discomfort associated with a Qutenza
application, we have developed a training program that we believe is best communicated through in-person training sessions using a contract clinical/nurse educator organization consisting of approximately 75 clinical educators. In addition, training
materials are planned to be available through a number of alternative venues including video, compact disc and web site access. As a result of this approach of encouraging and providing training prior to physicians treating patients, we anticipate
that sales of Qutenza in the first few quarters after launch, may be lower than otherwise expected, however, we believe that this approach will promote the long-term commercial success of Qutenza.

Reimbursement

We also anticipate providing reimbursement support to the physician practices to aid in their timely reimbursement both for Qutenza and their services related to its administration. Our goal is to secure
reimbursement under Medicare Part B for Qutenza and the related application procedure. We are in communication with the Center for Medicare Management within CMS and have requested a clarification of



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existing policy that suggests topical treatments are usually considered to be self-administered and therefore not eligible under Medicare Part B. Our label requires the administration of Qutenza
by a physician, or by a healthcare professional under the direct supervision of a physician. Therefore, we believe that Qutenza should be eligible under Medicare Part B. If we obtain concurrence from CMS as to the eligibility of Qutenza for Medicare
Part B coverage, we intend to seek local coverage determinations from the various Medicare contractors that process claims for CMS for the appropriate coding and reimbursement of Qutenza and the incident-to treatment. In addition, we
have requested product codes for Qutenza in the physician office (J code) and hospital outpatient (C code) settings.

Manufacturing

We manufacture Qutenza through the use of contract manufacturers. There are multiple primary raw material components of our active ingredient, synthetic capsaicin, all but one is generally available from
more than one supplier. We currently obtain our supplies of synthetic capsaicin from Formosa Laboratories, Inc., or Formosa, in Taiwan, who obtains the raw materials from qualified suppliers. While Formosa is our sole supplier currently, other
potential suppliers exist and we may consider qualifying a second source of supply in the future.

The Qutenza patch is
manufactured exclusively by LTS Lohmann Therapie-Systeme AG, or LTS, in Germany. LTS formulates the active ingredient from a powder into a dermal delivery system. Our commercial supply and license agreement with LTS establishes standard commercial
terms on which product will be supplied, as well as continuing the licenses initially granted in our clinical supply agreement. The term of the commercial supply and license agreement expires 10 years from the delivery of product first ordered under
the agreement and automatically renews for additional two year terms, unless terminated by either party with two years prior written notice. LTS has an alternative manufacturing site in the United States which is not currently an approved site for
the manufacture of Qutenza. We may decide in the future to seek approval for that site as an alternative source of supply of Qutenza.

We have engaged Contract Pharmaceuticals Limited Canada, or Contract Pharmaceuticals, as the manufacturer of our cleansing gel, a component of the Qutenza treatment, which is used to cleanse residual
capsaicin from the skin after a Qutenza application. While we currently have only one supplier for the cleansing gel, we believe there are a number of potential suppliers which we may evaluate as alternative sources of supply.

Distribution

We intend to distribute Qutenza through a network of specialty distributors and specialty pharmacies. We believe physicians will access Qutenza primarily through one of two distribution models. In one
model, the physician practice will take ownership of Qutenza, after having acquired it through a specialty distributor. Under this model, known as buy and bill, the physician is able to bill payers (or patients) for Qutenza, as well as
for their professional services related to its administration. In the second model, known as assignment of benefit, or AOB, the physician would order the product for a specific patient. A contracted specialty pharmacy would dispense
Qutenza for that patient, bill the patients health plan for Qutenza, and ship it to the treating physician for administration. The treating physician would administer Qutenza and bill the patients health plan for his or her professional
services related to its administration. This model is also known as the drop ship model.

We do not anticipate
that Qutenza will be available in retail pharmacies as is usually the case for self administered products. As a result, we expect that our initial product shipments will be limited and that our specialty distributors and specialty pharmacies will
stock relatively small quantities of Qutenza. We are currently working to finalize our distribution relationships with selected distribution channel partners.



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Territories outside of the United States.

Astellas License Agreement and Supply Agreement

In June 2009, we entered into the Astellas Agreement with Astellas, under which Astellas was granted an exclusive license to promote, distribute and market Qutenza in the Licensed Territory. Qutenza is
currently approved in the European Union and Astellas has advised us that it is their goal to launch Qutenza as soon as possible, with the aim to make Qutenza available in as many of the E.U. markets as possible before the end of 2010. It is
anticipated that selected countries will make Qutenza available in the coming weeks following the date of this filing. The Astellas Agreement provides for Astellas to be responsible for seeking regulatory approvals in the remainder of the Astellas
Territory. Astellas has recently filed for regulatory approval of Qutenza in Switzerland and we believe that Astellas is working to complete further regulatory submissions in 2010 and 2011.

The Astellas Agreement provided for an upfront payment for past development and the commercialization rights granted, of 30,000,000 Euro,
or $41,817,000. In addition, the agreement provided for an upfront payment of 5,000,000 Euro, or $6,970,000, for future development expenses and an option to license NGX-1998. Other elements of the Astellas Agreement include future milestone
payments of up to 65,000,000 Euro if certain predefined sales thresholds of the products licensed under the agreement are met and royalty payments, as a percentage of net sales of products under the agreement, with royalty rates starting in the high
teens and escalating into the mid twenties as revenues increase. These royalty payments are subject to a reduction upon entry of generic competition in the Licensed Territory. The Astellas Agreement requires us to participate on a joint steering
committee with Astellas to oversee the development and commercialization activities related to Qutenza and NGX-1998 during the term of the agreement, but not to exceed ten years. On the seventh anniversary of the Astellas Agreement, we have the
unilateral right to opt-out of participation on the joint steering committee. Additionally, such agreement provides for Astellas commitment to perform certain studies to support the marketing and promotion of Qutenza in the Licensed Territory,
and Astellas is responsible for conducting certain post European Commission approval marketing commitments, including a safety study in on-label indications.

The terms of the Astellas Agreement also provide for the development and potential commercial marketing and distribution of NGX-1998. Astellas development work with, and the right to distribute and
market NGX-1998 in the Licensed Territory, are tied to affirmative opt-in provisions of the Astellas Agreement. Such provisions allow for Astellas to carry out its election by making (in addition to the initial upfront payment of 5,000,000 Euro
received by us as described above) two additional NGX-1998 option payments totaling 5,000,000 Euro, each made at the election of Astellas after receipt from us of certain clinical development deliverables relating to Phase 2 development of NGX-1998.
If Astellas exercises such option by making all such payments, the Astellas Agreement provides that post-election development expenses for NGX-1998 will be shared equally by us and Astellas, and Astellas shall have the exclusive right to
commercialize NGX-1998 in the Licensed Territory. If Astellas does not exercise its option to commercialize NGX-1998, the Astellas Agreement terms preclude us from marketing NGX-1998 in the Licensed Territory for a period of time. The Astellas
Agreement will remain effective on a country-by-country and product-by-product basis until the later of ten years after the first commercial sale, expiration or abandonment of the last valid patent claim or expiration of all applicable periods of
regulatory data exclusivity. The Astellas Agreement may be terminated in the event of material breach or insolvency by either party, and Astellas may terminate the agreement for any reason without penalty, consequence or compensation on a
country-by-country and product-by-product basis upon written notice to us.

Pursuant to a Supply Agreement that we entered
into with Astellas in connection with our entry into the Astellas Agreement, we have agreed to provide Astellas with a sufficient supply of components of Qutenza to support its commercialization efforts, subject to certain limitations, until it can
establish a direct supply relationship with product manufacturers. The Supply Agreement requires us to provide Qutenza to Astellas at the same cost as we obtain such supply.

We and Astellas have further agreed under the Supply Agreement to enter into negotiations with the three principal manufacturers of components of Qutenza for the direct supply of such components to
Astellas. The three principal manufacturers identified in the Supply Agreement are LTS, Formosa, and Contract Pharmaceuticals.



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Rest of World

Qutenza is not currently approved in countries other than the United States and the European Economic Area. We retain rights to all
markets other than the Astellas Territory and we are currently working to identify potential commercialization partners in other world markets.

Competition

We expect
that Qutenza will compete against, and may be used in combination with, well-established products currently used both on and off-label in our target indications. The most directly competitive currently marketed products in the United States are
Lidoderm, an FDA-approved 5% lidocaine topical patch for the treatment of PHN marketed by Endo Pharmaceuticals, and Lyrica, an oral anti-convulsant, marketed by Pfizer for use in the treatment of PHN. In addition to these branded drugs, the FDA has
approved gabapentin (Neurontin) for use in the treatment of PHN. Pfizer has also received FDA approval of Lyrica for the treatment of PDN, fibromyalgia and epilepsy indications. The FDA has approved Cymbalta from Eli Lilly and Company, or Eli Lilly,
for use in the treatment of PDN, general anxiety disorder and depression; however we believe Cymbalta is used in PHN patients.

In addition to existing approved therapies for PHN, there are many other companies working to develop new drugs and other therapies to
treat pain in general and neuropathic pain in particular, including Pfizer, GlaxoSmithKline, Abbott Laboratories, Depomed, Inc., Newron Pharmaceuticals S.p.A., Novartis AG, UCB S.A. and Eli Lilly. Some of the compounds in development by such
companies are already marketed for other indications, such as depression and epilepsy. Other companies are focusing on new compounds or reformulations of existing compounds such as sustained release gabapentin.

We expect to compete on, among other things, the safety, efficacy and duration of action of Qutenza.

Competing successfully will depend on our continued ability to attract and retain skilled and experienced personnel and to identify,
secure the rights to and develop pharmaceutical products and compounds and to exploit these products and compounds commercially before others are able to develop competitive products. However, our ability to compete may be adversely affected because
insurers and other third-party payers in some cases seek to encourage the use of generic products making branded products less attractive, from a cost perspective, to buyers.

Qutenza in other Neuropathic Pain Indications

In addition to PHN, we have
studied Qutenza in two other neuropathic pain indications - HIV-DSP and PDN as set forth in the following table. Although Qutenza is approved in the European Union for neuropathic pain in non-diabetic adults, in the United States, additional studies
beyond those listed in the below table will likely be required to gain approval in these and other neuropathic pain indications.



|                  |  |                               |  |              |      |  |                        |  |     |        |  |                                             
|----------------- |  | ----------------------------- |  | ------------ | ---- |  | ---------------------- |  | --- | ------ |  | --------------------------------------------
|Indication        |  | DevelopmentActivity           |  | Trial Number |      |  | Number of Participants |  |     | Status
|HIV-DSP           |  | Phase 3                       |  |              | C119 |  |                        |  | 494 |        |  | Completed; primary endpoint
not met         
|                  |  |                               |  |             
|                  |  | Phase 3                       |  |              | C107 |  |                        |  | 307 |        |  | Completed; primary endpoint
met (p = 0.0026)
|                  |  |                               |  |             
|                  |  | Open-label safety study       |  |              | C118 |  |                        |  | 106 | *      |  | Completed                                   
|                  |  |                               |  |             
|                  |  | Phase 2                       |  |              | C109 |  |                        |  | 12  |        |  | Completed                                   
|                  |  |                               |  |             
|PDN, PHN,
HIV-DSP |  | Open-label tolerability study |  |              | C111 |  |                        |  | 117 | **     |  | Completed                                   





|* | C118 evaluated the safety of applications of Qutenza over a 12 month period. Of the 106 patients enrolled, 52 patients had HIV-DSP and 54 patients
had PHN.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|** | C111 evaluated the effect of topical anesthetic alternatives on tolerability of Qutenza and included 91 PDN patients, 25 PHN patients and 1 HIV-DSP patient.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------



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General Trial Design Criteria. Because all of our trials have focused on the
treatment of peripheral neuropathic pain, although in different indications, we have generally been able to employ a similar design in each trial. Patients in each of our trials have to be at least 18 years old and have intact, unbroken skin
over the painful area to be treated. Patients could be taking stable doses of other chronic pain medications, but could not be using any topical pain medications on the affected areas. Our blinded trials involve a randomly selected treated group and
a control group. The treated patients receive a single application of our Qutenza dermal delivery system in its standard formulation, containing an 8% concentration of synthetic capsaicin. Our control group patients receive a single application of a
low-dose version of our Qutenza dermal delivery system, containing 0.04% capsaicin. The control groups receive a low-dose capsaicin to ensure that these patients can feel the heat sensation produced by the active ingredient, so that they could not
tell that they are receiving the control. All patients receive a topical local anesthetic for one hour prior to application of the patch. The patch is then applied to all patients for a prescribed duration, usually 30 or 60 minutes, although in
some of our studies we also tested durations of 90 minutes. The amount of active ingredient delivered to the patient is dependent on the duration of patch application, since the capsaicin is absorbed into the skin over time. In our open-label
extension studies, the control group is eliminated and all participants may receive additional single application treatments of Qutenza, typically when pain has returned but not more frequently than once every 12 weeks.

General Objectives. The primary objective, or endpoint, of each of our Phase 3 clinical trials has been to assess the percent
change in average pain from baseline to weeks 2-8, in the case of PHN, or to weeks 2-12, in the case of HIV-DSP. If the primary endpoint is not met, the trial is generally considered to have been unsuccessful. Determining if
the primary endpoint has been achieved is based on statistical analysis that has been defined in the protocol, the measurement of which is known as the p value. A successful trial is generally based on meeting a p value of less than
0.05, which means that there is a greater than 95% likelihood that the drug was responsible for the difference in effect observed between the treated patients and those receiving a placebo (or in our case, a control patch). The primary method of
assessing baseline pain and pain over the course of the study is a Numeric Pain Rating Scale, or NPRS. Eligible subjects had moderate to severe neuropathic pain with a baseline average NPRS score, as measured over a period of one to two weeks prior
to treatment, typically of 3 to 9 (with 0 = no pain and 10 = worst possible pain). Secondary efficacy measures included methods of assessing pain other than with NPRS, such as the Patient and Clinical Global Impression of Change, Gracely Pain Scale,
Short-Form McGill Pain Questionnaire, and Brief Pain Inventory, as well as the proportion of responders, which are defined as patients who experience a certain minimal threshold of pain relief such as, the percentage of patients who
achieve at least a 30% reduction in pain as measured by the NPRS. Each of our studies also assessed safety and tolerability.

General Safety Findings. Our clinical trials have consistently demonstrated that Qutenza is well tolerated. In our Phase 3
trials, over 98% of subjects completed the prescribed duration of patch application, both during the double-blind phase and during the open-label phase of our trials. Treatment-related adverse events have primarily consisted of application-site
issues, such as redness, pain, burning, itching, dryness or swelling. Most of these events have been mild to moderate, however, severe application site events have been observed. The application site reactions have been generally short term and
managed with the application of cool compresses, ice or the use of short-acting opioids to relieve the treatment-related discomfort. Transient changes in blood pressure have been observed during the treatment and appear to follow treatment-related
changes in pain. We have not seen evidence of increased side effects with repeated treatment. In our clinical trials there have been three serious adverse events (totaling less than 1%) related to Qutenza, two related to pain and one case of
hypertension.



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Clinical Trial Results

Painful HIV-Distal Sensory Polyneuropathy

We have conducted two
controlled studies, an open-label extension study and an open-label long-term safety study evaluating the effect of Qutenza in subjects with HIV-DSP. Overall, 632 subjects have received Qutenza in these studies with over 1,000 Qutenza
treatments being administered.

Background on HIV-DSP. HIV-DSP is caused primarily by three factors: direct activation
of cells known as sensory neurons by the HIV virus, the immune systems fight against the infection and certain drugs administered to treat HIV. Painful HIV-DSP is characterized by significant pain in the feet and hands.

Potential Market. According to Frost & Sullivan, neuropathic pain is a common neurological complication of antiretroviral
treatments of HIV and affects approximately 15% of the HIV-infected community. According to the CDC, in 2007 the estimated number of AIDS diagnosis in the United States and dependent areas was 1,051,875. There are currently no specific treatments
approved in the United States or Europe for HIV-DSP. Estimates as to the number of people with HIV-DSP in the United States vary from under 200,000 to nearly 300,000. According to The Mattson Jack Group, 2007, there are approximately 270,000 and
136,000 people with HIV-DSP in the United States and in the United Kingdom, France, Germany, Italy and Spain, combined, respectively.

Clinical Trial Results

C119 Phase 3 Clinical Trial.In February
2008, we completed a randomized, double-blind, controlled trial performed at 77 sites in the United States, Canada, Australia and the United Kingdom. Inclusion criteria included pain due to HIV-DSP or neurotoxic antiretroviral drug exposure for at
least two months and average NPRS scores during the screening period of three to nine, inclusive. The primary objective of this study was to assess efficacy, safety, and tolerability of two doses of Qutenza, 30- and 60-minute applications, over the
12-week study period. The primary efficacy assessment was the change in average pain from baseline in weeks 2-12. We enrolled 494 subjects and randomly assigned them to receive either a 30-minute or 60-minute application of Qutenza
or control patches according to a 2:1 allocation scheme for each dose.

Study C119 did not meet its primary endpoint. Overall
there was a 29.5% reduction in pain in the Qutenza treatment group, a result that was consistent with what we have observed in other Qutenza studies. The control group reported a 24.6% reduction in pain from baseline, a control group response
greater than we observed in our prior HIV-DSP Phase 3 study. The p-value for this comparison was p=0.1. For the individual dose groups, the 30-minute Qutenza group achieved a 26.1% reduction in pain from baseline compared to the 30-minute control
group, which reported a 19.1% reduction in pain. The p-value for this comparison was p=0.1. The 60-minute dose group reported a 32.8% reduction in pain from baseline, however, the 60-minute control group reported a 30.1% reduction in pain (p=0.5).

C107 Phase 3 Clinical Trial. In 2005, we completed a randomized, double-blind, controlled, dose finding study of
Qutenza for the treatment of HIV-DSP performed at 32 sites in the United States. The primary objective of this study was to assess efficacy, safety, and tolerability of Qutenza. Efficacy was measured in terms of change in average pain
from baseline to weeks 2-12. The study consisted of a 12-week randomized, double-blind, controlled phase and a 40-week open-label extension. Three different dose levels (30-, 60- and 90-minute applications) were evaluated together, and then
each dose level was evaluated individually. The study also provided information about the efficacy, safety, and tolerability of repeated treatment with Qutenza over one year. A total of 307 subjects were enrolled at 32 clinical sites in
the United States, divided approximately equally among the 30-, 60- and 90-minute dose levels, with three patients treated with Qutenza for every one subject treated with the control.

The results of the study demonstrated that in the aggregate, across all active treatment groups, Qutenza significantly reduced pain in
subjects with HIV-DSP compared to the control group. Subjects treated with Qutenza demonstrated a mean reduction in pain score from baseline of 22.8% that was statistically greater than the 10.7% decrease in the control group (p = 0.0026).



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Among the individual dose groups, the 90-minute Qutenza group demonstrated a mean reduction
in pain of 24.7% that was significantly greater than the decrease of 10.7% reported by the control group (p = 0.005). The 60-minute Qutenza group also demonstrated a greater reduction in pain scores of 15.8%, but the difference from control was not
statistically significant. The 30-minute Qutenza group had a mean percent decrease from baseline of 27.7%, which was similar to the pain reduction reported for the 90-minute Qutenza group (p=0.0007). The effect of treatment was maintained for up to
12 weeks, with the Qutenza group demonstrating significantly greater pain reduction compared to the control group during the second week and at each subsequent week through week 12. Among several secondary measures of pain relief, all
three doses showed meaningful improvement compared to control. This study demonstrated that treatment with Qutenza was generally well tolerated. A single Qutenza treatment provided a stable reduction in pain over a 12-week period. Although the
pre-specified statistical testing of the primary analysis stopped after the 60-minute dose was found not to have reached statistical significance, the data from all the active dosing groups combined from this study, including evaluation of secondary
endpoints, support the conclusion that all the Qutenza doses tested (30-, 60-, and 90-minute) provided pain relief in subjects with HIV-DSP. Repeated treatments for up to one year in an open-label extension study appeared to have been equally
efficacious, generally well tolerated and without cumulative toxicity.

C118 Phase 2 Clinical Trial - Safety. This
study was a multicenter, open-label trial of Qutenza for the treatment of peripheral neuropathic pain in patients with HIV-DSP or PHN. The primary objective of this study was to assess the safety of up to four repeated applications of Qutenza for
the treatment of HIV-DSP and PHN. The study enrolled a total of 106 patients (52 HIV-DSP and 54 PHN). Qutenza treatments were generally well tolerated with greater than 98% of subjects completing the prescribed duration of treatment. We believe the
study demonstrated that Qutenza was not associated with increasing toxicity following multiple treatment cycles. Further, clinical assessments suggested no impairment of protective nerve function (such as the ability to feel pressure or heat) over
the one year study period.

Prior Clinical Experience. In 2003, we completed C109, an open-label pilot study of
prescription strength capsaicin patches in the treatment of HIV-DSP. The primary objective of this study was to obtain preliminary information on the efficacy, safety, and tolerability of Qutenza in subjects with HIV-DSP. This Phase 2,
multicenter, open-label trial enrolled 12 subjects at three clinical sites in the United States. Subjects received a single 60-minute treatment with Qutenza and were followed for 12 weeks. This study demonstrated that treatment with
Qutenza was feasible and was generally well-tolerated. The study also provided preliminary evidence of efficacy indicating that Qutenza could reduce pain associated with HIV-DSP for 12 weeks after treatment.

Painful Diabetic Neuropathy

Background on PDN. PDN is caused by injury to the sensory nerves, which arises from the toxic effects of some glucose metabolites and damage to blood vessels associated with nerves. The condition
causes progressive pain or loss of feeling in the toes, feet, legs, hands and arms. Like HIV-DSP, PDN is typically first felt as pain in the feet and hands.

Potential Market. The CDC estimates that 24 million people in the United States have diabetes, of which it is estimated by Jain PharmaBiotech 2008, or Jain, that 6.0 million suffered from
some form of neuropathy. The number of PDN sufferers in the United States is currently estimated by Jain to be 3.0 million. According to The Mattson Jack Group, there are approximately 2.85 million people with PDN in the United Kingdom,
France, Germany, Italy and Spain, combined.

Clinical Trial Results

Phase 2a Clinical Trial Description. In 2004, we completed C111, a randomized, open-label multicenter evaluation of the
tolerability of treatment with Qutenza in conjunction with pre-patch topical application of one of three lidocaine 4%-based local anesthetic products. The study enrolled 25 subjects with PHN, 91 subjects with PDN and 1 subject with
HIV-DSP. Tolerability of the procedure was similar among all topical anesthetics tested. Preliminary efficacy data were obtained for the PHN group and the PDN group.



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PHN subjects experienced a 27.7% reduction in pain over weeks 2 through 12; pain was reduced by 31.4% in PDN subjects. Our experience in C111 suggests that neuropathies of the feet, such as
PDN and HIV-DSP, regardless of the underlying disease, may respond similarly to treatment with Qutenza.

Our Other Product Development
Programs

Our current product development programs are focused on candidates in the field of pain with a primary focus on
peripheral neuropathic pain. We retain worldwide rights to these product candidates with the exception of NGX-1998 for which we have granted Astellas an option to license in the Astellas Territory. Our portfolio consists of the following product
candidates:



|                                                      |  |                                              |  |                                                                                                    
|----------------------------------------------------- |  | -------------------------------------------- |  | ---------------------------------------------------------------------------------------------------
|Product Candidate                                     |  | Indication                                   |  | Phase of Development                                                                               
|NGX-1998                                              |  | Peripheral neuropathic pain                  |  | IND filed in June 2008. Three Phase 1 studies completed. Planning to initiate Phase 2 study in 2010
|Acetaminophen Prodrugs (NGX-1576, NGX-9674, NGX-5752) |  | Traumatic pain, post-surgical pain and fever |  | Preclinical development  seeking outlicense partner                                               
|Opioid Prodrugs (NGX-6052)                            |  | Acute pain and chronic pain                  |  | Preclinical development  seeking outlicense partner                                               

NGX-1998Liquid High Concentration Topical Capsaicin

We are
developing a liquid formulation of the same active ingredient in Qutenza for the treatment of peripheral neuropathic pain, as well as potentially for other chronic pain syndromes. NGX-1998 is intended to provide:



| |  |  | Rapid Delivery: Deliver capsaicin more rapidly into the skin than Qutenza, without allowing significant amounts to enter the bloodstream,
thereby potentially shortening the treatment without impacting the safety or efficacy profile. By reducing treatment time, a larger base of physicians may be willing to administer NGX-1998.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Improved Comfort: Reduce treatment-related discomfort. We believe that the rapid delivery of capsaicin may reduce the need for pre-treatment
with a local anesthetic, as the extremely rapid skin delivery of capsaicin could quickly inhibit the activity of nerve fibers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expanded Indications: The liquid formulation can be applied to many places on the body that pose a challenge for a patch formulation, expanding
the potential indications to include such pain syndromes as arthritis, vulvodynia and oral mucositis.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

An
investigational new drug application, or IND, was filed for NGX-1998 in June 2008, under which we have conducted one Phase 1 study to evaluate potential control formulations for future controlled clinical studies. In addition, NGX-1998 has been
evaluated in two Phase 1 clinical studies under an exploratory IND. In one study, we tested multiple liquid capsaicin formulations in order to identify those with the highest surrogate efficacy and tolerability characteristics. A second study
involving 30 healthy volunteers evaluated the effect of NGX-1998 on epidermal nerve fiber density, which we believe may be a surrogate measure of efficacy. Each volunteer was treated with NGX-1998 for 5, 15 and 25 minutes as well as a 60-minute
application of Qutenza. Epidermal nerve fiber density was measured by punch biopsy seven days after treatment for the treated areas and for one placebo treated area from each volunteer that was taken as a control. In addition, the study evaluated
treatment related discomfort at each of the treatment times. Results of the study indicate that each of the three NGX-1998 treatment times produced comparable nerve fiber density reduction as that observed following a 60-minute application of
Qutenza and all groups showed a statistically significant reduction in nerve fiber density compared to control. The study also indicated a significant reduction in treatment related discomfort between all of the NGX-1998 treatment groups and
Qutenza.



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Acetaminophen Prodrug Candidates  Preclinical Program

Acetaminophen, first approved by the FDA for marketing in the United States in 1955, is the most widely used drug for pain relief and the
reduction of fever in the United States and is currently available in numerous pharmaceutical products. Acetaminophen is often perceived to be safer than other non-steroidal anti-inflammatory drugs, or NSAIDs. Although acetaminophen is used widely
in over-the-counter and some oral prescription products, two major limitations exist regarding its use. First, due to the intrinsic low solubility of acetaminophen, its ability to be used in injected or infused formulations is significantly
impacted, limiting non-orally administered usage of acetaminophen (e.g. for post-operative pain). Second, is acetaminophen-induced liver toxicity, which is the most common cause of acute liver failure in the United States, prompting label
requirements which were enacted by the FDA in 2006 regarding the potential for liver damage and, in 2009, the FDA convened an Advisory Committee Meeting to address the public health problem of liver injury related to the use of acetaminophen. We
believe that we have the potential to overcome these two limitations through the discovery of novel prodrugs of acetaminophen.

Acetaminophen in injectable or intravenous formulations are available in the European Union and are marketed by Bristol-Myers Squib under the trade name Perfalgan®. Such acetaminophen formulations require a 15-minute, 100 mL infusion as these formulations provide only 10 mg of
acetaminophen per mL due to acetaminophens intrinsic low solubility. Despite this inconvenient dosing requirement, Perfalgan has become the market-leading injectable analgesic in the European Union. In the United States, this same formulation
has been licensed by and is under development by Cadence Pharmaceuticals, under the trade name Acetavance®.

To address the low water solubility of acetaminophen, we have designed NGX-9674 and NGX-5752 which are novel prodrugs of
acetaminophen. Preliminary data from our pre-clinical studies indicates that these prodrugs are approximately 10 times more soluble in water than acetaminophen.

To address safety concerns regarding acetaminophen use, specifically the potential for liver damage, we have developed NGX-1576, a novel prodrug which couples acetaminophen to a molecule known to prevent
acetaminophen induced-liver toxicity. We have evaluated NGX-1576 in preclinical studies, including in animal models. One such study in mice indicated that certain dose levels of NGX-1576 produce less liver-toxicity than equivalent doses of
acetaminophen with pharmacokinetic data also showing equivalent blood levels between NGX-1576 and acetaminophen treated mice.

NGX-6052
Opioid Analgesic Prodrug Preclinical Program

Opioid analgesics, a mainstay of pain management, are used to manage pain
associated with a wide variety of acute and chronic conditions. However, despite their effectiveness and widespread use, pain management with opioids presents many well-recognized challenges. Acute adverse effects associated with opioid
administration include nausea, vomiting, itching and the potential for respiratory depression. In addition, constipation and bowel dysfunction are commonly experienced. Actions in the central nervous system induce sedation, dizziness and cognitive
impairment. Finally, another highly visible issue is the potential for opioid abuse. Many companies have developed or are developing formulations in an attempt to alleviate the adverse side effects or the abuse potential of commonly used opioid
analgesics.

We have designed and synthesized prodrugs of a number of commonly prescribed opioid analgesics. We believe that
our novel compounds, which are prodrugs of existing well known and widely used opioids, may have inherent abuse resistance, the potential for decreased gastro-intestinal side effects for oral dosage forms, and facilitate bolus dosing while
potentially limiting peak systemic exposure from these injected or infused compounds. Our most advanced compound, NGX-6052, has been evaluated in vitro and in vivo proof-of-concept studies.



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Patents and Proprietary Rights

Our success will depend in part on our ability to protect Qutenza and future products and product candidates by obtaining and maintaining
a strong proprietary position both in the United States and in other countries. To develop and maintain our proprietary position, we will rely on patent protection, regulatory protection, trade secrets, know-how, continuing technological innovations
and licensing opportunities.

The commercial success of Qutenza depends, in part, on a device patent granted in the United
States, and corresponding patents granted in certain European Union countries, Canada and Hong Kong. These device patents cover the use of a prescription strength-capsaicin dermal delivery system for the treatment of neuropathic pain. The U.S.
device patent expires in December 2017 (although we have applied for patent restoration due to certain regulatory delay in the application process, which, if granted would extend the expiration date), with the corresponding patents outside the
United States expiring at approximately the same time. We exclusively license these patents on a worldwide basis from the University of California. We do not currently own, and do not have rights under this license agreement, to any issued patents
that cover Qutenza other than in the United States, certain European Union countries, Canada, and Hong Kong.

In addition, we
licensed a method patent granted in the United States from the University of California covering the use of prescription strength capsaicin delivery for the treatment of neuropathic pain. This patent expires in December 2016. Although our rights
under the license agreement are worldwide, there are no corresponding granted patents or patent applications relating to this patent outside the United States. Two of the three inventors named in the method patent did not assign their patent rights
to the University of California. As a result, our rights under this patent are non-exclusive. Anesiva, Inc., or Anesiva, a company also focused on the development and commercialization of treatments for pain, has licensed the right to use the
technology under the method patent from one of the non-assigning inventors. Anesiva has recently filed for bankruptcy and is in the process of liquidation. There can be no assurances that other entities will not obtain rights to use the technology
under the method patent through this liquidation process or through direct license from the other inventors. If other entities license the right to use this patent, we may face more products competitive with Qutenza and our business will suffer.

Under the terms of our license agreement with the University of California, we are required to pay royalties on net sales of
the licensed product up to a maximum of $1.0 million per annum as well as a percentage of upfront and milestone payments resulting from the sublicense of our rights under the agreement. As a result of the Astellas Agreement, in February 2010 we
paid a sublicense fee totaling $1.2 million to the University of California. In addition, we are also required to make three annual cash payments in an aggregate amount of $12,000. The last of these payments is expected to be paid in 2010. Such
agreement terminates on a country by country basis as to products covered by it on the date that such products are not covered by a claim of either an unexpired patent or a patent application that has been outstanding less than 10 years from its
filing date.

We currently license the rights from LTS to three pending U.S. patent applications, patents granted in certain
European Union countries and pending patent applications in certain European Union countries, Canada and more than 10 other foreign countries, each filed and prosecuted by LTS. These patents and patent applications contain claims covering the
composition and manufacture of microreservoir patches, which includes the type of patch used in Qutenza. We license the rights to these patents and patent applications on a worldwide basis under a January 2007 exclusive commercial supply and license
agreement with LTS, which is subject to certain purchase and other obligations. The first of the issued patents licensed under the commercial supply and license agreement expires in June 2020, with the last expiration date among such patents being
September 2025. During 2009, as a result of achieving marketing approval for Qutenza, we made a one time milestone payment to LTS of approximately $0.1 million. The term of the commercial supply and license agreement extends until January 2020 and
automatically renews for additional two year terms, unless terminated by either party with two years prior written notice.



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We have also filed several patent applications in the United States, European Union, and
certain other countries relating to kits, methods and formulations to remove residual capsaicin left on the skin after a topical application of capsaicin, as well as a number of patent applications which deal with differing formulations and delivery
models of capsaicin at varying concentrations, including an application that supports our NGX-1998 program. We have also filed patent applications related to our acetaminophen prodrugs and opioid prodrug platform which contain both composition and
method claims. We have also licensed an issued patent which we believe to be relevant to our opioid prodrug platform.

The patent positions of pharmaceutical companies like us are generally uncertain and involve complex legal, scientific and factual questions. In addition, the coverage claimed in a patent application can
be significantly reduced before the patent is issued. Consequently, we do not know whether any of the products or product candidates we acquire or license will result in the issuance of patents or, if any patents are issued, whether they will
provide significant proprietary protection or will be circumvented or challenged and found to be unenforceable or invalid. For example, one or more of the inventors named in the method patent which we have licensed from the University of California,
may assert a claim of inventorship rights to the device patent, also licensed from the University of California, which could result in our loss of exclusive use of this patent. Although we do not believe these individuals are co-inventors, there can
be no assurance that we would prevail if such a claim were asserted. The absence of exclusive rights to utilize such patent exposes us to a greater risk of direct competition and could materially harm our business. In addition, other parties may own
patent rights that might be infringed by our products or other activities. For example, in 2005 and again in 2007, Winston Laboratories informed us of their U.S. patent related to cis-capsaicin, and suggested that our synthetic capsaicin formulation
could infringe this patent. We responded by denying any infringement and we believe that the patent referenced in these communications from Winston Laboratories has since expired. In limited instances, patent applications in the United States and
certain other jurisdictions are maintained in secrecy until patents issue, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain of the priority of inventions covered
by pending patent applications. Moreover, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention or in opposition proceedings in a foreign patent office, any of
which could result in substantial cost to us, even if the eventual outcome is favorable to us. There can be no assurance that a court of competent jurisdiction would hold the patents, if issued, valid. An adverse outcome could subject us to
significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease using such technology. To the extent prudent, we intend to bring litigation against third parties that we believe are
infringing our patents. We also rely on trade secret protection for our confidential and proprietary information. No assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or
otherwise gain access to our trade secrets or disclose such technology or that we can meaningfully protect our trade secrets. However, we believe that the substantial costs and resources required to develop technological innovations will help us
protect our products. Our competitors or other intellectual property holders may assert that our products or trademarks and the methods we employ are covered by their intellectual property rights. For example, we have received a letter indicating a
possible trademark conflict for Qutenza® from a company claiming that our trademark was similar to theirs. While
we believe that these assertions do not have merit and that we have defenses to them, there can be no assurance that we will be successful in defending our trademark. We intend to continue to use the Qutenza trademark and to vigorously defend our
use of such trademark against such assertions.

It is our policy to require our employees, consultants, contractors, or
scientific and other advisors, to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed or made known to the individual during
the course of the individuals relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. These agreements provide that all inventions related to our business that are conceived by the
individual during the course of our relationship, shall be our exclusive property. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized
use or disclosure of such information.



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Government Regulation

United States

Regulation by governmental authorities in the United
States and other countries is a significant factor in the development, manufacture and marketing of pharmaceuticals. Our product and product candidates require regulatory approval by governmental agencies prior to commercialization. Specifically,
Qutenza will be subject to significant ongoing review and evaluation by regulatory authorities which could result in discovery of previously unknown problems, side effects or other factors that may affect the marketing approval, including causing a
withdrawal of such approval or may require significant additional investment by the company to maintain the marketing approval.

Our products candidates are subject to rigorous preclinical testing and clinical trials and other premarketing approval requirements by
the FDA and regulatory authorities in other countries. Various federal, state and foreign statutes and regulations govern or affect the manufacturing, safety, labeling, storage, record-keeping and marketing of pharmaceutical products. The lengthy
process of seeking required approvals and the continuing need for compliance with applicable statutes and regulations require the expenditure of substantial resources. When and if regulatory approval is obtained for any of our product candidates,
the approval may be limited in scope, which may significantly limit the indicated uses for which our product candidates may be marketed, promoted and advertised. Additionally, approval may be conditioned upon our agreement to conduct further
studies, which could either delay our planned product launch and/or significantly increase our costs in order to comply with these commitments. Following is a discussion of the regulatory environment that is typically applicable to pharmaceutical
product candidates

Preclinical Studies

Before testing any compounds with potential therapeutic value in human subjects in the United States, stringent governmental requirements for preclinical data must be satisfied. Preclinical testing
includes both in vitro and in vivo laboratory evaluation and characterization of the safety and efficacy of a drug and its formulation. Preclinical testing results obtained from these studies, including tests in several animal species,
are submitted to the FDA as part of an investigational new drug application, or IND, and are reviewed by the FDA prior to the commencement of human clinical trials. These preclinical data must provide an adequate basis for evaluating both the safety
and the scientific rationale for the initial trials in human volunteers.

Clinical Trials

If a company wants to conduct clinical trials in the United States to test a new drug in humans, an IND must be prepared and submitted
with the FDA. The IND becomes effective, if not rejected or put on clinical hold by the FDA, within 30 days of filing the application. In addition, an Institutional Review Board must review and approve the trial protocol and monitor the trial
on an ongoing basis. The FDA may, at any time during the 30-day review period or at any time thereafter, impose a clinical hold on proposed or ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials cannot commence or recommence
without FDA authorization and then only under terms authorized by the FDA. The IND application process can result in substantial delay and expense.

Clinical Trial Phases

Clinical trials typically are conducted in three
sequential phases, Phases 1, 2 and 3, with Phase 4 trials potentially conducted after marketing approval. These phases may be compressed, may overlap or may be omitted in some circumstances.



| |  |  | Phase 1 clinical trials. After an IND becomes effective, Phase 1 human clinical trials can begin. These trials evaluate a drugs
safety profile and the range of safe dosages that can be administered to healthy volunteers or patients, including the maximum tolerated dose that can be given to a trial subject. Phase 1 trials also determine how a drug is absorbed,
distributed, metabolized and excreted by the body, and duration of its action.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Phase 2 clinical trials. Phase 2 clinical trials are generally designed to establish the optimal dose, to evaluate the potential
effectiveness of the drug in patients who have the target disease or condition and to further ascertain the safety of the drug at the dosage given in a larger patient population.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Phase 3 clinical trials. In Phase 3 clinical trials, the drug is usually tested in a controlled, randomized trial comparing the
investigational new drug to a control (which may be an approved form of therapy) in an expanded and well-defined patient population and at multiple clinical sites. The goal of these trials is to obtain definitive statistical evidence of safety and
effectiveness of the investigational new drug regime as compared to control in defined patient populations with a given disease and stage of illness.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Additionally, the Food and Drug Administration Amendments Act of 2007, or FDAAA, requires that all controlled clinical trials conducted for our drug candidates be included in a clinical trials registry
database that is available and accessible to the public through the internet. If we fail to properly participate in the clinical trial database registry we would be subject to significant civil monetary penalties.

Manufacturing Process Development

In order to gain marketing approval, a product candidates manufacturing process must be evaluated through a lengthy and detailed review process to ensure that it can be consistently manufactured to
meet predetermined specifications. A robust manufacturing process must be developed and validated for both the active ingredient and the formulated product candidate which ensures that the product can be reproducibly manufactured at the intended
commercial scale. Appropriate specifications must be developed and approved to ensure that the quality and safety of the product can be assured. Analytical methods used for quality control testing must be developed and validated to ensure each lot
of product meets the approved specifications. Stability testing of active ingredient and drug product must be performed to provide evidence that the product remains stable over time and that a shelf life for the product can be established. The FDA
reviews the adequacy of the manufacturing process, specifications, quality control testing and stability during the NDA application process. In addition, an inspection of the manufacturing site is performed to ensure the adequacy of the
manufacturing facility to meet both the technical manufacturing requirements and compliance to current good manufacturing practices or cGMP regulations.

New Drug Application

After completion of clinical trials, if there is
substantial evidence that the drug is both safe and effective, an NDA is prepared and submitted for the FDA to review. The NDA must contain all of the essential information on the drug gathered to that date, including data from preclinical studies
and clinical trials, and the content and format of an NDA must conform with all FDA regulations and guidelines. In addition, the FDA generally requires successful completion of at least two adequate and well-controlled Phase 3 clinical trials
to gain marketing approval for an indication. Accordingly, the preparation and submission of an NDA is an expensive and major undertaking.

The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information from the sponsor rather than accepting an NDA for filing. In such an event, the NDA must be
submitted with the additional information and, again, is subject to review before filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. By law, the FDA has 180 days in which to review the NDA and
respond to the applicant. Under the goals and policies agreed to by the FDA under PDUFA IV, the FDA has 10 months from the submission date in which to complete its initial review of a standard NDA and respond to the applicant and six months from the
submission date for a priority NDA. The FDA may meet its PDUFA requirements by completing its initial review within the specified time-frames 90% of the time. Additionally, the FDA does not always meet the PDUFA goal dates for standard or priority



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NDAs. The review process is often significantly extended as a result of FDA requests for additional information and clarification. The FDA may refer the application to an appropriate advisory
committee, typically a panel of clinicians, for review, evaluation and a recommendation as to whether the application should be approved and the scope of any approval. The FDA is not bound by the recommendation, but gives great weight to it. Upon
completion of the FDAs review of the NDA, it issues either an approval letter or a complete response letter. A complete response letter may describe any activities which may be required to gain approval or may indicate that a product candidate
is not approvable.

The Hatch-Waxman Act

Under the Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Act, newly approved drugs may benefit from a statutory period of non-patent data exclusivity in the
United States. The Hatch-Waxman Act provides 5 years of data exclusivity to the first applicant to gain approval of an NDA under Section 505(b) of the Food, Drug and Cosmetic Act for a new chemical entity. A drug qualifies as a new chemical
entity if the FDA has not previously approved any other drug containing the same active ingredient. Hatch-Waxman provides data exclusivity by prohibiting abbreviated new drug applications, or ANDAs, and 505(b)(2) applications, which are marketing
applications where the applicant does not own or have a legal right of reference to all the data required for approval, to be submitted by another company for another version of such drug during the exclusivity period. Protection under Hatch-Waxman
will not prevent the filing or approval of a full NDA under Section 505(b)(1) for the same active ingredient, although the applicant would be required to conduct its own adequate and well-controlled clinical trials to demonstrate safety and
effectiveness. Qutenza was granted new chemical entity status by the FDA and has therefore been granted five year data exclusivity under the Hatch-Waxman Act.

The Hatch-Waxman Act also provides three years of data exclusivity for the approval of supplemental NDAs for new indications, dosages or strengths of an existing drug if new clinical investigations are
essential to the approval. This three-year exclusivity covers only the changes associated with the supplemental NDA and does not prohibit the FDA from approving ANDAs for drugs containing the original active ingredient.

The Hatch-Waxman Act also permits a patent extension term of up to five years as compensation for patent term lost during product
development and the FDA regulatory review process. However, patent extension cannot extend the remaining term of a patent beyond a total of 14 years. The patent term restoration period is generally one-half the time between the effective date
of an IND and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application. Only one patent applicable to an approved drug is eligible for the extension and it must be applied for prior to
expiration of the patent. The U.S. Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for patent term extension. We have submitted an application for patent term extension for the device patent licensed
from the University of California, and we believe that we may be eligible for an approximately four and a half year extension to the term for this patent.

Orphan Drug Designation

The FDA may grant orphan drug designation to drugs
intended to treat a rare disease or condition that affects fewer than 200,000 individuals in the United States. Orphan drug designation must be requested before submitting an NDA. If the FDA grants orphan drug designation, the generic identity of
the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. If a product that has orphan drug
designation subsequently receives FDA approval for the indication for which it has such designation, the product is entitled to orphan exclusivity, which means the FDA may not approve any other applications to market the same drug for the same
indication, except in very limited circumstances, for up to seven years after receiving FDA approval.

We were granted orphan
status for the use of capsaicin to treat PHN and HIV-DSP. When appropriate, we may seek orphan status for additional indications and products. We cannot predict the ultimate impact, if any, of orphan status on the timing or likelihood of FDA
approval for use of Qutenza on additional, orphan indications or on any of our potential future products.



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Fast Track Designation and Priority Review

The FDAs fast track program is intended to facilitate the development and expedite the review of drugs that are intended for the
treatment of a serious or life-threatening condition for which there is no effective treatment and which demonstrate the potential to address unmet medical needs for their condition. We were granted fast track designation of Qutenza for treatment of
HIV-DSP in July 2004. When appropriate, we intend to seek additional fast track designations for our product candidates. We cannot predict the ultimate impact, if any, of the fast track process on the timing or likelihood of FDA approval on any
proposed label expansion for Qutenza or on any of our potential future products.

In some cases, after an NDA has been
accepted for review by the FDA, the FDA may designate a product for priority review. A product is eligible for priority review, or review within a targeted six-month time frame from the time an NDA is accepted for filing, if the product provides a
significant improvement compared to marketed products in the treatment, diagnosis or prevention of a disease. A fast-track designated product generally meets the FDAs criteria for priority review. We cannot guarantee any of our products will
receive a priority review designation, or if a priority designation is received, that review or approval will be faster than conventional FDA procedures.

If we seek approval for HIV-DSP from the FDA, we intend to seek and we believe that we may be granted priority review for Qutenza in the treatment of HIV-DSP as there are currently no approved drugs for
the treatment of this disease. However, there can be no assurance that we will be granted priority review.

Other
Regulatory Requirements

Any products we manufacture or distribute under FDA approvals are subject to pervasive and
continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with the products. Drug manufacturers and their subcontractors are required to register with the FDA and, where appropriate, state agencies,
and are subject to periodic unannounced inspections by the FDA and state agencies for compliance with cGMP, regulations which impose procedural and documentation requirements upon us and each third party manufacturer we utilize.

The FDA closely regulates the marketing and promotion of drugs. A company can make only those claims relating to safety and efficacy that
are approved by the FDA. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties. Physicians may prescribe legally available drugs for uses that
are not described in the products labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for
many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, restrict manufacturers from communicating on the subject of off-label use.

The FDAs policies may change and additional government regulations may be enacted which could affect Qutenza and our future product
candidates or approval of new indications for our products. We cannot predict the likelihood, nature or extent of adverse governmental regulations that might arise from future legislative or administrative action, either in the United States or
abroad.

European Union

Clinical Trials

In common with the United States, the various phases of
preclinical and clinical research in the European Union are subject to significant regulatory controls. The regulatory controls on clinical research in the European Union are now largely harmonized following the implementation of the Clinical Trials
Directive



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2001/20/EC, or CTD. Compliance with the national implementations of the CTD has been mandatory from May 1, 2004. However, variations in the member state regimes continue to exist,
particularly in the small number of member states that have yet to implement the CTD fully. Clinical trials must be separately authorized in each European Union member state where they are conducted.

All member states currently require regulatory and independent ethics committee approval of interventional clinical trials, as well as
informed consent and other measures to protect the interest of human subjects. European regulators and ethics committees also require the submission of adverse event reports during a study and a copy of the final study report. Procedures exist to
suspend studies if necessary to protect the safety of subjects.

Our Marketing Authorization for Qutenza has been transferred
to Astellas pursuant to the Astellas Agreement and as a result, Astellas is responsible for ongoing maintenance and post approval requirements associated with Qutenzas MA. In addition, Astellas is responsible for future regulatory applications
in the Astellas Territory. Astellas also has an option to license our product candidate, NGX-1998. If they elect to exercise this option, Astellas will be responsible for regulatory matters associated with this product candidate in the Astellas
Territory. If Astellas does not exercise this option, we have agreed to not seek regulatory approval for NGX-1998 in the Astellas Territory.

Approvals Outside of the United States and the Astellas Territory

We and Astellas will also be subject to a wide variety of foreign regulations governing the development, manufacture and marketing of our
products should we or Astellas decide to seek regulatory approvals in other world markets. The approval process varies from country to country and the time needed to secure approval may be longer or shorter than that required for FDA approval or a
European marketing authorization. We offer no assurance that clinical trials conducted in one country will be accepted by other countries or that approval in one country will result in approval in any other country.

Third-Party Reimbursement and Pricing Controls

General. In the United States and elsewhere, patients access to pharmaceutical products depends in significant part on the coverage and reimbursement of a product or service by third party
payers, such as government programs, private insurance plans and employers. Third party payers increasingly are challenging the medical necessity of and prices charged for medical products and services. It will be time consuming and expensive for us
to go through the process of seeking reimbursement from Medicare, Medicaid and private payers. We may be unable to achieve reimbursement from some payers because they may not consider our products to be reasonable and necessary or
cost-effective. Furthermore, it is possible that even if payers are willing to reimburse for our products, the reimbursement levels may not be sufficient to allow us to sell our products on a competitive and profitable basis.

In many foreign countries, particularly the countries in the European Union, the pricing of prescription drugs is subject to direct
governmental control and is influenced by drug reimbursement programs that employ a variety of price control mechanisms. In the European Union, governments influence the price of pharmaceutical products through their pricing and reimbursement rules
and control of national health care systems that fund a large part of the cost of such products to consumers. The approach taken varies from country to country. Some jurisdictions operate positive and/or negative list systems under which products
may only be marketed once a reimbursement price has been agreed. Other member states allow companies to fix their own prices for medicines, but monitor and control company profits. The downward pressure on health care costs in general, particularly
prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to restrict the entry of new products, as exemplified by the National Institute for Clinical Excellence in the United Kingdom which evaluates the
data supporting new medicines and passes reimbursement recommendations to the government. In addition, in some countries cross-border imports from low-priced markets (parallel imports) exert a commercial pressure on pricing within a country. With
regard to Qutenza, Astellas is responsible for seeking pricing approvals in the Astellas Territory.



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In the United States, there have been, and we expect that there will continue to be, a
number of federal and state proposals to implement means by which the government can negotiate lower drug prices for Medicare and Medicaid beneficiaries. While we cannot predict whether such legislative bills will become law, their enactment could
have a material adverse effect on our business, financial condition and results of operations.

Medicare. We plan to
market Qutenza for use in the treatment of pain associated with PHN. We expect that in the United States a majority of the patients who are treated with Qutenza for this indication will be Medicare beneficiaries. CMS is the agency within the
Department of Health and Human Services that administers both the Medicare and Medicaid programs. Because Qutenza is a dermal delivery system that in accordance with its FDA approved label, must be applied by a physician or under the direct
supervision of a physician, two elements of Medicare reimbursement may be relevant to Qutenza: the availability of reimbursement for services to administer Qutenza and the availability of reimbursement for Qutenza itself.

CMS has the authority not to cover particular products or services if it determines that they are not reasonable and
necessary for the treatment of Medicare beneficiaries. CMS may make a national coverage determination, or NCD, for a product, which establishes on a nationwide basis the indications that will be covered, and any restrictions or limitations.
However, for most new drugs that are eligible for payment, CMS does not create an NCD. We currently do not anticipate seeking an NCD for Qutenza. However, CMS or a third party may request an NCD independent of us. If such request is made, we can not
assure you that such NCD will contain favorable coverage terms.

If there is no NCD, the local Medicare contractors that are
responsible for administering the program on a state or regional basis have the discretion to deny coverage and reimbursement for the drug or issue a local coverage determination, or LCD. These LCDs can include both coverage criteria for the drug
and frequency limits for the administration of the drug. The local contractors in different areas of the country may determine that Qutenza should be treated like most patches and may deny coverage under Part B or, even if they allow coverage, may
establish varying coverage criteria and frequency limits for Qutenza. Furthermore, overturning restrictive LCDs in the various regions can be a time-consuming and expensive process.

We are currently evaluating various methods of gaining reimbursement for Qutenza. We are currently seeking reimbursement under Medicare
Part B. As mentioned above, if Medicare coverage for Qutenza is available, CMS may determine to reimburse through one of two avenues: Part B coverage for physician-administered drugs or Part D coverage for outpatient prescription drugs.
Under Part B coverage, Medicare reimburses physicians for purchasing and administering drugs that meet the following statutory requirements:



| |  |  | The product is reasonable and necessary;
| | - |  | ----------------------------------------



| |  |  | The product is not usually self-administered;
| | - |  | ---------------------------------------------



| |  |  | The product is administered in conjunction with a physicians service; and
| | - |  | --------------------------------------------------------------------------



| |  |  | The administering physician bills Medicare directly for the product.
| | - |  | --------------------------------------------------------------------

Currently, topical products are considered usually self-administered; therefore, coverage under Part B would require a
specific determination by CMS that Qutenza differs from most topical products and should therefore be covered under Part B. There can be no assurance that we will obtain such a determination or that such a determination will be made in a timely
fashion. For reasons discussed below, failure to obtain such a determination could materially and adversely affect our revenue.

Medicare payment for physician services related to the administration of Qutenza, if any, will be determined according to a prospectively
set payment rate, linked to a procedure code established by the American Medical Association. These codes, called Current Procedural Terminology, or CPT, describe the procedure performed. We believe that existing CPT codes may be inadequate and that
a specific code for



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Qutenza administration may be required. We may apply for such a CPT code. At launch, local Medicare contractors may require claims to be submitted with an existing miscellaneous CPT code until
such time as we are granted a specific CPT code. Use of miscellaneous codes typically cause claims processing delays and may lead to lower payments to physicians. An alternative to seeking a specific CPT code and the use of a miscellaneous code in
the interim, we may pursue reimbursement of physician services associated with the Qutenza treatment utilizing existing office visit codes, such as evaluation and management services codes, which have established reimbursement amounts.

Under Medicare Part B, reimbursement for Qutenza is currently limited to 106% of the manufacturers average sales price (as
defined by statute and regulation). CMS has been considering other changes to Medicare reimbursement that could result in lower payments for physician-administered drugs, and Congress may also consider legislation that would mandate lower
reimbursement levels. A reduction in reimbursement levels could materially and adversely affect our revenue.

CMS may
determine that Qutenza does not qualify for Part B coverage and should instead be covered under the Part D outpatient prescription drug benefit. Unlike Part B, Part D reimburses only for the drug itself and does not provide
reimbursement for the physicians administration services. Even though a product is reimbursed under Part D, local contractors may permit physicians to bill under Part B for their administration services. Physicians may not consider Qutenza as
attractive a treatment option if it is reimbursed under Part D instead of Part B. In addition, under Part D, there are multiple types of plans and numerous plan sponsors, each with its own formulary and product access requirements.
While CMS evaluates Part D plans proposed formularies for potentially discriminatory practices, the plans have considerable discretion in establishing formularies, establishing tiered co-pay structures and placing prior authorization and
other restrictions on the utilization of specific products. Moreover, Part D plan sponsors are permitted and encouraged to negotiate rebates with manufacturers. Revenue for Qutenza will be substantially affected by its formulary status on
Part D plans and the rebates that Part D plan sponsors are able to negotiate.

Medicaid. Most State Medicaid
programs have established preferred drug lists, or PDLs, and the process, criteria and timeframe for obtaining placement on the PDL varies from State to State. A federal law establishes a minimum rebate, currently 15.1%, that a manufacturer must pay
for Medicaid utilization of a brand-name product, and many States have established supplemental rebate programs as a condition for including a drug product on a PDL. Submitting a PDL application to each State will be a time-consuming and expensive
process, and it is not clear how many or which State programs will accept the applications. Review times for these applications can vary from weeks to 14 months or more.

Private Insurance Reimbursement. Commercial insurers usually offer two types of benefits: medical benefits and pharmacy benefits. In most private insurance plans, physician-administered drugs are
provided under the medical benefit. If private insurers decide to cover Qutenza, they will reimburse for the drug and its administration in a variety of ways, depending on the insurance plans policies, employer and benefit manager input and
contracts with their physician network. Like Medicare and Medicaid, commercial insurers have the authority to place coverage and utilization limits on physician-administered drugs. Private insurers tend to adopt reimbursement methodologies for a
product similar to those adopted by Medicare. Revenue for Qutenza may be materially and adversely affected if private payers make unfavorable reimbursement decisions or delay making favorable reimbursement decisions.

Employees

As of
December 31, 2009, we had 45 employees, of which 23 work in research and development, 17 work in general and administrative and 5 work in sales and marketing. None of our employees are represented by a labor union or are the subject of a
collective bargaining agreement.

Facilities

We lease approximately 26,386 square feet of space in our headquarters in San Mateo, California under a lease that expires in July 2012. We have no laboratory, research or manufacturing facilities.



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Form of Organization

We were incorporated in California as Advanced Analgesics, Inc. on May 28, 1998 and changed our name to NeurogesX, Inc. in September 2000. In February 2007, we reincorporated into Delaware.

Available Information

We file electronically with the Securities and Exchange Commission, or SEC, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The public may read or copy any materials we file with the SEC at the SECs Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC. The address of that site is http://www.sec.gov.

You may obtain a free copy of our annual reports
on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports on the day of filing with the SEC on our website on the World Wide Web at http://www.neurogesx.com or by contacting our corporate offices by
calling 650-358-3300. Information contained on our website is not part of this report or any other report filed with the SEC.



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PART II



|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included elsewhere in
this report. Operating results are not necessarily indicative of results that may occur in future periods.

Overview

We are a biopharmaceutical company focused on developing and commercializing novel pain management therapies. We are assembling a
portfolio of pain management product candidates based on known chemical entities to develop innovative new therapies that we believe may offer substantial advantages over currently available treatment options. Our initial focus is on the management
of chronic peripheral neuropathic pain conditions.

Our first commercial product, Qutenza, the first prescription strength
capsaicin product is a dermal delivery system designed to treat certain neuropathic pain conditions and was approved by the FDA in November 2009 for the management of neuropathic pain associated with PHN. We are currently preparing to commercialize
Qutenza in the United States with our own sales force and we believe that Qutenza will be commercially available in the United States in the first half of 2010.

In May 2009, Qutenza received an MA, in the European Union for the treatment of peripheral neuropathic pain in non-diabetic adults, either alone or in combination with other medicinal products for pain.
In June 2009, we entered into the Astellas Agreement, with Astellas. or Astellas under which Astellas was granted an exclusive license to commercialize Qutenza in the Licensed Territory. Astellas has advised us that it is their goal to launch
Qutenza as soon as possible, with the aim to make Qutenza available in as many of the E.U. markets as possible before the end of 2010. It is anticipated that selected countries will make Qutenza available in the coming weeks following the date of
this filing.

We are currently evaluating the nature, scope and timing of continued development of Qutenza to support the
potential for label expansion in the United States. Areas of potential focus for label expansion include HIV-distal sensory neuropathy, or HIV-DSP, also known as HIV-associated neuropathy, or HIV-AN, painful diabetic neuropathy, or PDN, and
potentially other neuropathic pain indications. Our plans for continued Qutenza development efforts are being evaluated in light of Astellas plans for market support studies and satisfaction of the European Medicines Agency, or EMEA,
post-approval regulatory commitments. In addition to potential continued development of Qutenza, we have an early stage development pipeline which consists of:



| |  |  | NGX-1998, a topical liquid formulation of capsaicin for potential use in neuropathic pain conditions;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | NGX-1576, NGX-9674 and NGX-5752, prodrugs of acetaminophen for potential use in acute pain, including traumatic pain, post-surgical pain and fever; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | NGX-6052, an opioid prodrug for potential use in chronic pain indications.
| | - |  | --------------------------------------------------------------------------

NGX-1998 has been evaluated in three Phase 1 studies and we currently anticipate re-initiating our development of this product candidate
in 2010. The other product candidates are in the pre-clinical stage of development and may or may not be the subject of further development in 2010 or beyond. Further, we are currently seeking development partners for our acetaminophen and opioid
prodrug product candidates.



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##### Table of Contents

To date we have not generated any significant revenues and have funded our operations
primarily by selling equity securities, establishing debt facilities and through a collaboration agreement with Astellas. We have incurred significant losses since our inception. We had cash, cash equivalents and short-term investments totaling
$50.6 million at December 31, 2009 and during the twelve months ended December 31, 2009, we used $17.7 million in operating activities after adjusting for cash inflows from the Astellas Agreement. We expect to continue to incur annual
operating losses over the next several years and those losses will likely increase in the near term as we continue our efforts to commercialize Qutenza in the United States. Additionally, we expect to resume development of NGX-1998 and potentially
our other product candidates. With respect to our notes payable, the outstanding balance at December 31, 2009 was $0.2 million and it is has been fully repaid as of January 2010.

Critical Accounting Policies and Significant Judgments and Estimates

Our
managements discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these
financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. Actual results could differ from those estimates.

While our significant accounting policies are described in more detail in Note 2 of Notes to Consolidated Financial Statements
included elsewhere in this report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

We entered into the Astellas Agreement in June of 2009, which grants Astellas an exclusive license to promote, distribute and market Qutenza in the Licensed Territory, grants an option to exclusively
license NGX-1998 (a non-patch liquid formulation of capsaicin) in the Licensed Territory, obligates us to participate on a joint steering committee and through a related supply agreement entered into along with the Astellas Agreement and requires us
to supply Qutenza components to Astellas until direct supply arrangements are established between Astellas and the manufacturers of such components. Revenue under this arrangement includes upfront non-refundable fees and may also include
further option payments for the development of and license to NGX-1998, milestone payments upon achievement of certain product sales levels, as well as royalties on product sales.

We view the Astellas Agreement and related agreements as a multiple element arrangement with the key elements consisting of an exclusive
license to Qutenza in the Licensed Territory, an obligation to conduct certain development activities associated with NGX-1998, participation on a joint steering committee, and supply of Qutenza components to Astellas until such time that Astellas
can establish a direct supply relationship with product vendors, which we anticipate may occur between 18 to 24 months from the execution of the Astellas Agreement. Because not all of these elements have both standalone value and objective and
reliable evidence of fair value, we are accounting for them as a single unit of accounting in accordance with Codification Topic 605-25, Multiple Element Arrangements. Further, as the Astellas Agreement provides for a joint steering committee
and we believe that our involvement in that committee is a substantive performance obligation under the arrangement, we plan to recognize revenue associated with upfront payments and future license fees related to NGX-1998, if any, ratably over the
term of the performance obligations with respect to the joint steering committee, which we estimate to be the last delivered item in the arrangement. We have estimated this performance obligation to be delivered ratably through June 2016. At the
inception of the arrangement, the upfront license fees were subject to a refund right, which expired upon transfer of our MA for Qutenza in the European Union to Astellas. The transfer of the Qutenza MA to Astellas was completed, and revenue
recognition of the upfront license fee commenced in September 2009.



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##### Table of Contents

Research and Development

We expense research and development costs as incurred. Research and development expenses include:



| |  |  | personnel and personnel related costs;
| | - |  | --------------------------------------



| |  |  | costs associated with pre-clinical and clinical development activities, such as clinical trials, including amounts paid to clinical research
organizations and clinical investigators;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | product and manufacturing costs such as process development, clinical product supply costs and the cost of commercially saleable product that is
manufactured prior to market approval for that product candidate;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | internal and external costs associated with our regulatory compliance and quality assurance functions including the costs of outside consultants and
contractors that assist in the process of submitting and maintaining regulatory filings; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | overhead costs including allocated facility and related expenses.
| | - |  | -----------------------------------------------------------------

Stock-Based Compensation

We account for our stock-based compensation in accordance with the fair value recognition provisions of current authoritative guidance using the prospective transition method. Stock-based compensation
expense for all stock-based compensation awards granted after December 31, 2005 is based on the grant-date fair value estimated in accordance with the provisions of current authoritative guidance. Under Topic 718, Compensation  Stock
Compensation, or Topic 718, stock-based awards, including stock options, are recorded at fair value as of the grant date and recognized to expense over the employees requisite service period (generally the vesting period), which we have
elected to amortize on a straight-line basis. Because non-cash stock compensation expense is based on awards ultimately expected to vest, it has been reduced by an estimate for future forfeitures. Topic 718 requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent periods.

We estimate the fair value of options granted using the
Black-Scholes option valuation model and the assumptions used shown in Note 8 to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. Significant judgment is required on the part of management in determining the
proper assumptions used in this model. The assumptions used in the Black-Scholes option valuation model include the risk free interest rate, expected term, expected volatility and expected dividend yield. We base our assumptions on historical data
where available or when not available, on a peer group of companies. However, these assumptions consist of estimates of future market conditions, which are inherently uncertain, and therefore subject to managements judgment. See Note 8 of
Notes to Consolidated Financial Statements included elsewhere in this report for further detail.

Inventory

Inventories are determined at the lower of cost or market value with cost determined under the specific identification
method. Inventories consist of raw materials, work in process and finished goods. Raw materials include the active pharmaceutical ingredient for a product to be manufactured, work in process includes the bulk inventory of Qutenza patch and cleansing
gel that are in the process of being manufactured or have completed manufacture and are awaiting final packaging, including related internal labor and overhead costs and finished goods include the final packaged kits that contain the Qutenza patch
and cleansing gel and that are ready for commercial sale. At December 31, 2009, the inventory amount was not material and was included in Prepaid expenses and other current assets.



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##### Table of Contents

Clinical Trials

We accrue and expense costs for clinical trial activities performed by third parties, including clinical research organizations and
clinical investigators, based upon estimates made, as of the reporting date, of the work completed through the reporting date as a percentage of the total work contracted for under our agreements with such third parties. We make our estimates at the
end of each reporting period after discussion with internal personnel and outside service providers and thorough evaluation as to progress or stage of completion of trials or services, as of the end of each reporting period. On a periodic basis we
adjust our estimated clinical trial costs to reflect actual expenses incurred to date. Due to the nature of the estimation of clinical trial costs, we may be required to make changes to our estimates in the future as we become aware of additional
information about the status or conduct of clinical trials.

Results of Operations

In accordance with our revenue recognition policy, we commenced recording revenue for the upfront payments from Astellas when such
payments became nonrefundable. In the twelve months ended December 31, 2009, the upfront payment of $48.8 million received from Astellas became nonrefundable as a result of our transfer of the Qutenza MA to Astellas in September 2009; and
accordingly, in the twelve months ended December 31, 2009 we recorded $1.9 million of Collaboration revenue. The remaining upfront payment will be recognized as revenue on a straight line basis over the remaining service period of the joint
steering committee, which we estimate will expire in June 2016. Under our supply agreement with Astellas, we are obligated to supply product, at our cost, until such time as Astellas establishes its own supply relationship with suppliers.

Astellas has advised us that it is their goal to launch Qutenza as soon as possible, with the aim to make Qutenza available
in as many of the E.U. markets as possible before the end of 2010. It is anticipated that selected countries will make Qutenza available in the coming weeks following the date of this filing. Upon the expected launch of Qutenza by Astellas, we
expect to commence recording royalty revenue based upon Astellas net sales of Qutenza in the Astellas Territory. The timing of recording royalty revenue from Astellas may lag by as much as a quarter due to timing of Astellas reporting such
royalties to us.

Our research and development expenses consist of internal and external costs. Our internal costs are
primarily employee salaries and benefits, contract employee expense, non-cash stock compensation expense, allocated facility and other overhead costs. Our external costs are primarily expenses related to the development of product candidates
including formulation development, manufacturing process development, non-clinical studies, clinical trial costs, such as the cost of clinical research organizations and clinical investigators, milestone payments to our licensors in connection with
the use of certain intellectual property, and costs associated with preparation and filing of regulatory submissions. Additionally, external and internal costs related to manufacturing and quality assurance activities for production batches of our
active pharmaceutical ingredient, patches and cleansing gel, which are destined for commercial sale in the United States, were recorded to research and development expense if purchase of such components occurred prior to FDA approval.

We commence tracking the separate, external costs of a project when we determine that a project has a reasonable chance of entering
clinical development. Senior management discusses the possibility of entering clinical development, along with the possibility of meeting other regulatory milestones, throughout the development cycle. These discussions include consideration of the
costs and time required to bring the project to market and the potential market acceptance. We do not maintain and evaluate research and development costs by specific therapeutic indications within a program due to the difficulties in allocating
such costs to specific indications. We use our internal research and development resources across several projects and many resources may not be attributable to specific projects or indications. Thus, we do not allocate the internal resources to
specific development programs. Over time, we believe that our internal costs are expended on our development projects generally in proportion to our external development costs for such project relative to total external development costs



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##### Table of Contents

In the years ended December 31, 2009, 2008 and 2007, our research and development costs
totaled $11.2 million, $16.1 million and $25.3 million, respectively. The following table reflects the distribution of our research and development costs by development program:

Year ended December 31;

(in thousands)



|     |  |         |        |  |          |   |     |                                        |  |   |               |  |  |       |       |  |  |   |        | 
|---- |  | ------- | ------ |  | -------- | - | --- | -------------------------------------- |  | - | ------------- |  |  | ----- | ----- |  |  | - | ------ | 
|     |  | Qutenza |        |  | NGX-1998 |   |     | AcetaminophenProdrug andOpioid Prodrug |  |   | Internalcosts |  |  | Total |      
|2009 |  | $       | 3,634  |  |          | $ | 133 |                                        |  | $ | 6             |  |  | $     | 7,462 |  |  | $ | 11,235 | 
|2008 |  |         | 5,740  |  |          |   | 609 |                                        |  |   | 502           |  |  |       | 9,253 |  |  |   | 16,104 | 
|2007 |  |         | 15,354 |  |          |   | 976 |                                        |  |   | 388           |  |  |       | 8,603 |  |  |   | 25,321 | 

The process of
conducting preclinical testing and clinical trials necessary to obtain marketing approvals in the United States and other regions is costly and time consuming. The probability of success for each product candidate and clinical trial may be affected
by a variety of factors, including, among others, patient enrollment, manufacturing capabilities, successful clinical results, our funding, and competitive and commercial viability. As a result of these and other factors, we are unable to determine
the duration and completion costs of current or future clinical stages of our product candidates or when or to what extent we will generate revenues from commercialization and sale of any of our unapproved product candidates. Currently we are
planning the entry into phase 2 of NGX-1998. NGX-1998 is our most advanced product candidate and costs to complete development for this program could be significant. Pursuant to our license agreement with Astellas, we might receive future option
payments related to this program at Astellas election. Further, if Astellas exercises its option to license NGX-1998, Astellas would be responsible for 50% of the costs incurred for Phase 3 clinical development.

We anticipate that our overall research and development expenses, excluding non-cash stock-based compensation expense, may increase
beginning in 2010 with the majority of that increase expected to occur in the second half of 2010 as we currently expect to resume development activities for NGX-1998 and potentially one or more of our other development programs.

Our selling, general and administrative expenses consist primarily of salaries and benefits, including those of our sales, marketing,
commercial operations and administrative functions such as finance, human resource, legal, medical affairs and information technology. Additionally, selling, general and administrative expenses include marketing expenses, commercialization costs,
pharmacovigilance costs and costs associated with our status as a public company and patent costs. In addition, general and administrative expenses include allocated facility, basic operational and support costs and insurance costs. We anticipate
that our selling, general and administrative expenses will increase significantly during 2010 and over the next several years as a result of our anticipated commercialization of Qutenza in the first half of 2010. These increases are likely to be
attributable to increasing marketing activities, the costs of hiring and deploying a sales force in the United States and infrastructure costs to support commercial operations, and the costs of being a public company, as well as the need to add
additional personnel in all of the key functional areas that support growth of our general operations, including accounting and finance, legal and human resources.



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##### Table of Contents

Comparison of Years Ended December 31, 2009 and 2008



|                                             |  |                                    |         |   |          |   |         |            |  |  |            |   |  |  |     |   
|-------------------------------------------- |  | ---------------------------------- | ------- | - | -------- | - | ------- | ---------- |  |  | ---------- | - |  |  | --- | --
|                                             |  | Year Ended December 31,            |         |   | Increase |   |         | % Increase | 
|                                             |  | 2009                               |         |   | 2008     |   |         | (Decrease) |  |  | (Decrease) |  
|                                             |  | (in thousands, except percentages) |        
|Collaboration revenue                        |  | $                                  | 2,006   |   |          | $ |        |            |  |  | 2,006      |   |  |  |    |   
|Research and development expenses            |  |                                    | (11,235 | ) |          |   | (16,104 | )          |  |  | (4,869     | ) |  |  | (30 | %)
|Selling, general and administrative expenses |  |                                    | (12,420 | ) |          |   | (10,182 | )          |  |  | 2,238      |   |  |  | 22  | % 
|Interest income                              |  |                                    | 89      |   |          |   | 1,106   |            |  |  | (1,017     | ) |  |  | (92 | %)
|Interest expense                             |  |                                    | (276    | ) |          |   | (792    | )          |  |  | (516       | ) |  |  | (65 | %)

Collaboration
Revenue. Collaboration revenue of $2.0 million recorded in the year ended December 31, 2009 consisted primarily of $1.9 million attributed to the amortization of upfront payments received pursuant to the Astellas Agreement.

Research and Development expenses. Research and development expenses decreased $4.9 million, or 30%, to $11.2 million in the year
ended December 31, 2009 from $16.1 million for the same period in 2008. Our lower spending in research and development reflects our decision to focus our cash and human resources on those activities directly in support of gaining marketing
approval for Qutenza in the United States and the European Union as well as certain limited pre-commercialization activities. Specifically, the decrease was attributable to a $2.7 million decrease in clinical study costs as we completed the Phase 3
clinical program which supported our NDA filing in 2008; a $1.7 million decrease in employee related costs commensurate with our reduced clinical trial activity; a $1.0 million decrease in spending related to NGX-1998 and our earlier stage product
candidates as these programs were deferred to preserve cash resources; a $0.5 million reduction in regulatory expenses associated with the preparation and submission of our NDA in 2008 and support for our Marketing Authorization Application with the
EMEA; a $0.2 million decrease in quality assurance costs associated with clinical trial activity in 2008; a $0.2 million decrease associated with the capitalization of employee related costs attributable to the manufacture of commercial product for
sale in both the Astellas Licensed Territory and the United States; and a $0.1 million decrease in manufacturing related costs. These decreases were partially offset by a $1.2 million charge representing the sublicense fee payable to the University
of California in connection with the receipt of upfront payments from Astellas under the Astellas Agreement as well as a $0.3 million increase in non-cash stock-based compensation expense.

Selling, General and Administrative expenses. Selling, general and administrative expenses increased $2.2 million, or 22%, to
$12.4 million in the year ended December 31, 2009 from $10.2 million for the same period in 2008. The year over year change was due to a $0.7 million increase in non-cash stock-based compensation expense primarily associated with the grant of
fully vested stock options to certain of our officers and a $1.0 million increase in selling, general and administrative employee related expenses as a result of an increase in staffing in support of commercialization activities including the
establishment of a medical affairs function. Also contributing to the year over year change was a $0.4 million increase in costs associated with work to support our pricing and reimbursement strategies.

Interest income. Interest income decreased $1.0 million, or 92%, to less than $0.1 million for the year ended December 31,
2009 from $1.1 million for the same period in 2008. This change was primarily attributable to a decline in the prevailing interest rates, o in general, and lower rates obtained as we moved our invested assets to those with lower relative risk in
light of events in the credit markets.

Interest expense.Interest expense decreased $0.5 million, or 65%, to $0.3
million for the year ended December 31, 2009 from $0.8 million for the same period in 2008. This decrease was related to the reduction in the outstanding principal balance of notes payable as a result of the scheduled payoff and repayment of
principal on the remaining outstanding notes payable.

Comparison of Years Ended December 31, 2008 and 2007



|                                    |  |                                    |         |   |          |   |         |            |  |   |            |   |  |  |      |   
|----------------------------------- |  | ---------------------------------- | ------- | - | -------- | - | ------- | ---------- |  | - | ---------- | - |  |  | ---- | --
|                                    |  | Year Ended December 31,            |         |   | Increase |   |         | % Increase | 
|                                    |  | 2008                               |         |   | 2007     |   |         | (Decrease) |  |   | (Decrease) |  
|                                    |  | (in thousands, except percentages) |        
|Research and development expenses   |  | $                                  | (16,104 | ) |          | $ | (25,321 | )          |  | $ | (9,217     | ) |  |  | (36  | %)
|General and administrative expenses |  |                                    | (10,182 | ) |          |   | (7,455  | )          |  |   | 2,727      |   |  |  | 37   | % 
|Interest income                     |  |                                    | 1,106   |   |          |   | 1,718   |            |  |   | (612       | ) |  |  | (36  | %)
|Interest expense                    |  |                                    | (792    | ) |          |   | (1,219  | )          |  |   | (427       | ) |  |  | (35  | %)
|Other income (expense), net         |  |                                    | (14     | ) |          |   | 366     |            |  |   | (380       | ) |  |  | (104 | %)



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Research and Development expenses. Research and development expenses decreased $9.2
million, or 36%, to $16.1 million in the year ended December 31, 2008 from $25.3 million for the same period in 2007. The year over year change was attributable to, in part, a decision to reduce our non-clinical and clinical development
expenses related both to potential label expansion of Qutenza as well as our other product candidate programs. This was due to our desire to preserve cash resources to support our regulatory submissions processes in both the United States and the
European Union and to devote resources to certain pre-commercialization activities. Specifically, our research and development expenses declined as a result of a $7.8 million decrease in clinical study related costs associated with Qutenza. During
2007, we were conducting two Phase 3 clinical trials, whereas we completed our most recent Phase 3 clinical trial in the first half of 2008. Also contributing to the year over year change was a $0.9 million decrease related to manufacturing costs in
support of Qutenza. In 2007, our manufacturing costs were primarily attributed to manufacturing development activities including validation of our active pharmaceutical ingredient, or API, manufacturing processes to support our MAA submission in the
third quarter of 2007 and manufacturing costs associated with support of our two Phase 3 clinical trials, whereas in 2008 there was a lower level of activity in these areas. Additionally, there was a $0.3 million decrease in external regulatory
expenses resulting from the recognition of our Qutenza Marketing Authorization Application for Qutenza in the European Union , or MAA filing fees in the third quarter of 2007. Additional decreases included a $0.3 million reduction in spending
related to NGX-1998, which was primarily driven by the completion of IND-enabling non-clinical toxicology studies in 2007, a $0.2 reduction in external quality assurance costs as a result of a lower level of clinical trial activity in 2008 and a
$0.1 million reduction in non-cash stock based compensation expense. These decreases were partially offset by a $0.7 million increase in spending related to our manufacturing support infrastructure and increased staffing within the regulatory and
quality assurance functions to support our regulatory submissions and prepare for commercial launch of Qutenza.

Selling,
General and Administrative expenses. General and administrative expenses increased $2.7 million, or 37%, to $10.2 million in the year ended December 31, 2008 from $7.5 million for the same period in 2007. The year over year change was due
to a $1.2 million increase in spending for pre-commercialization activities such as medical education, marketing materials development and work in support of our pricing and reimbursement strategies. Also contributing to the year over year change
was a $0.8 million increase in general and administrative and marketing employee related expenses as a result of an increase in staffing in support of being a public company and in support of pre-commercialization activities and a $0.4 million
increase in allocated overhead costs related to the move of our corporate headquarters to San Mateo, California in October 2007. Other increases were due to the costs of being a public company, including a $0.4 million increase in directors and
officers insurance expense, professional fees and other public company costs. These increases were partially offset by a $0.1 million decrease in non-cash stock based compensation expense.

Interest income. Interest income decreased $0.6 million, or 36%, to $1.1 million in 2008 from $1.7 million in 2007. This decrease
was primarily attributable to a decrease in the rate of return on our invested assets as rates declined in the market, in general, and as we moved our invested assets to investments of lower relative risk in light of events in the credit markets.
The decrease in our interest income was somewhat limited due to the fact that we had a higher average investment balance during 2008 as compared to 2007.

Interest expense.Interest expense decreased $0.4 million, or 35%, to $0.8 million in 2008 from $1.2 million in 2007. This decrease was related to the reduction in the outstanding principal balance
of notes payable as a result of the scheduled repayment of principal on those notes payable.

Other income (expense),
net. Other income (expense), net, decreased $0.4 million to less than $0.1 million in expense in 2008 from $0.4 million in income in 2007. The other income amount of $0.4 million in the 2007 period was attributable to a decline in the fair value
of our preferred stock warrant liability. Due to the conversion of all outstanding shares of preferred stock into common stock in connection with our IPO in the second quarter of 2007, these warrants became exercisable for common stock, were
reclassified to stockholders equity and are no longer required to be recorded at fair value at each reporting date. We performed a final remeasurement in the period ended June 30, 2007 and have ceased to record any further periodic fair
value adjustments.



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Accretion of Redeemable Convertible Preferred Stock

Our redeemable convertible preferred stock outstanding prior to our initial public offering was redeemable at the request of the holders
on or after June 30, 2008. We accreted the carrying value of the preferred stock issuances to the redemption amount using the effective interest method through periodic charges to additional paid-in capital. Upon completion of our initial
public offering on May 1, 2007, our preferred stock converted to common stock and the carrying value of our preferred stock was reclassified to common stock and additional paid-in capital.

Liquidity and Capital Resources

Since our inception through December 31, 2009, we have funded our operations primarily by selling equity securities, establishing debt facilities and through a collaboration agreement with Astellas.
On May 7, 2007, we completed an initial public offering of our common stock which resulted in net cash proceeds, after deducting total expenses including underwriting discounts and commissions and other-offering related expenses, of
approximately $38.1 million. On December 28, 2007 we completed the first closing of a private placement of our common stock and warrants resulting in net cash proceeds of $21.5 million and on January 3, 2008, we completed the second and
final closing of this private placement of our common stock and warrants resulting in net cash proceeds of $2.3 million.

As
of December 31, 2009, we had approximately $50.6 million in cash, cash equivalents and short-term investments. We also had working capital, adjusted to exclude the current portion of non-cash deferred revenue of approximately $7.2 million,
of $46.5 million. Our cash and investment balances are typically held in a variety of interest bearing instruments including corporate bonds, commercial paper, money market funds and obligations of U.S. government agencies. Cash in excess of
immediate operational requirements is invested in accordance with our investment policy primarily with a view to capital preservation and liquidity. Further, to reduce portfolio risk, our investment policy specifies a concentration limit of 10% in
any one issuer or group of issuers of corporate bonds or commercial paper at the time of purchase. Our investment holdings at December 31, 2009 consist solely of U.S. Treasury or money market funds consisting of only U.S. Treasury securities.

Net cash provided by operating activities was approximately $29.2 million in 2009 and net cash used in operating activities
was approximately $27.3 million and $28.7 million in 2008 and 2007, respectively. Net cash used in 2008 and 2007 consisted of external research and development expenses, internal personnel costs associated with our research and development programs
and infrastructure costs supporting our research and development activities. Net cash provided by operating activities in 2009 was primarily a result of the receipt of an upfront payment under the Astellas Agreement, partially offset by our net loss
during the period. Included in net cash provided by and used in operating activities are net changes in assets and liabilities affecting cash. After adjusting for the affects of the Astellas payment, our net cash used in operating activities would
have been approximately $17.7 million in 2009, which was significantly lower than our net cash used in operations in 2008 and 2007. This decrease was a direct result of our decision in 2009 to limit our spending on research and development
activities in order to focus resources on supporting our regulatory processes in both the United States and the European Union and to certain pre-commercialization activities. We anticipate that cash used in operating activities will likely increase
in 2010 as a result of our commercialization activities to support the launch of Qutenza in the United States as well as due to the potential resumption of activities associated with the NGX-1998 development program.

Net cash used in investing activities was approximately $7.4 million in 2009, net cash provided by investing activities was approximately
$7.8 million in 2008 and net cash used in investing activities was approximately $19.2 million in 2007. Investing activities consisted primarily of the purchase, sale and maturity of marketable securities and to a lesser extent, the purchase of
capital equipment. Fluctuations in our investing activities have primarily been driven by the timing and receipt of proceeds from financing activities and the upfront payments from Astellas. We expect that property and equipment expenditures will
increase in 2010 due to the capital needs for infrastructure to support our commercial operations.



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Net cash used in financing activities was approximately $2.5 million and $1.6 million in
2009 and 2008, respectively and net cash provided by financing activities was approximately $67.4 million in 2007. Financing activities in 2009 consisted primarily of the exercise of stock options and issuance of stock to employees pursuant to
our employee stock purchase plan, offset by principal repayments on our venture loan financing arrangements. In addition to these activities, financing activities in 2008 also included the sale of our common stock and warrants in a private placement
transaction. In 2007, financing activities consisted primarily of our IPO, a private placement of our common stock and warrants and the exercise of warrants underlying our preferred stock, partially offset by principal repayments on our venture loan
financing arrangements.

Contractual obligations represent future cash commitments and liabilities under agreements with third
parties, and exclude contingent liabilities for which we cannot reasonably predict future payment. The following table represents our total contractual obligations, including principal and interest, at December 31, 2009, aggregated by type (in
thousands):



|                               |  |                        |       |  |      |   |       |               |  |   |               |  |  |                    |    |  |  |  |  | 
|------------------------------ |  | ---------------------- | ----- |  | ---- | - | ----- | ------------- |  | - | ------------- |  |  | ------------------ | -- |  |  |  |  | 
|                               |  | Payments due by period |      
|Contractual Obligations        |  | Total                  |       |  | 2010 |   |       | 2011 and 2012 |  |   | 2013 and 2014 |  |  | 2015 andthereafter |   
|Operating Lease Obligations(1) |  | $                      | 1,253 |  |      | $ | 581   |               |  | $ | 656           |  |  | $                  | 15 |  |  |  |  | 
|Notes Payable(2)               |  |                        | 193   |  |      |   | 193   |               |  |   |               |  |  |                    |    |  |  |  |  | 
|Purchase obligations(3)        |  |                        | 1,563 |  |      |   | 1,238 |               |  |   | 255           |  |  |                    | 70 |  |  |  |  | 
|                               |  |                        |       |  |      |   |       |               |  |   |               |  |  |                    |    |  |  |  |  | 
|Total                          |  | $                      | 3,009 |  |      | $ | 2,012 |               |  | $ | 911           |  |  | $                  | 85 |  |  |  |  | 
|                               |  |                        |       |  |      |   |       |               |  |   |               |  |  |                    |    |  |  |  |  | 



|(1) | Represent our future minimum rental commitments for our noncancelable operating lease obligations for our facilities and office equipment.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents the final payments under a venture loan agreement entered into in fiscal year 2006.
|--- | ----------------------------------------------------------------------------------------------

|(3) | Consists of commitments to third party manufacturers of Qutenza and NGX-1998 for manufacturing, stability and related services including reimbursable amounts from
Astellas for the Supply of Qutenza based on Astellas Agreement.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition to the above, we have commitments
to pay royalties on certain patents we licensed from the University of California for prescription strength capsaicin for neuropathic pain. Under the terms of this license agreement we are required to pay royalties on net sales of the licensed
product up to a maximum of $1,000,000 per annum as well as a percentage of upfront and milestone payments or resulting from sublicense of our rights under the agreement.

We also have commitments to pay royalties under a Commercial Supply and License Agreement with LTS to manufacture commercial and clinical supply of Qutenza. Under the terms of the agreement, we are
required to pay a transfer price for product purchased under the agreement as well as a royalty on net sales of product purchased under such agreement

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



| |  |  | the success of the commercialization of our products;
| | - |  | -----------------------------------------------------



| |  |  | the costs of establishing sales and marketing infrastructure, distribution capabilities and a sales force;
| | - |  | ----------------------------------------------------------------------------------------------------------



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| |  |  | the scope and cost of commercial activities including, but not limited to, costs associated with pharmacovigilance and medical affairs activities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the conduct of manufacturing activities;
| | - |  | ----------------------------------------



| |  |  | the costs of carrying out our obligations under our commercial arrangement with Astellas;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | our ability to establish and maintain strategic collaborations, including licensing and other arrangements that we have or may establish;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs and timing of seeking regulatory approvals;
| | - |  | -----------------------------------------------------



| |  |  | the progress of our development programs including the number, size and scope of clinical trials and non-clinical development;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs involved in enforcing or defending patent claims or other intellectual property rights; and
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | the extent to which we acquire or invest in other products, technologies and businesses.
| | - |  | ----------------------------------------------------------------------------------------

At December 31, 2009, we had $50.6 million in cash, cash equivalents and short-term investments and the balance of our notes payable
totaled $0.2 million. During the twelve months ended December 31, 2009, after adjusting for the upfront fees collected from Astellas, we used a total of $17.7 million in operating activities. We currently anticipate that our cash usage in 2010
will increase significantly from 2009 as a result of spending related to our commercialization and product launch activities for Qutenza, and to a lesser extent as a result of the potential resumption of development activities related to NGX-1998
and potentially our other development programs. We anticipate that our existing cash and investments will be sufficient to meet our projected operating requirements beyond December 31, 2010.

To date, we have incurred recurring net losses and negative cash flows from operations. Until we can generate significant cash from our
operations, if ever, we expect to continue to fund our operations with existing cash resources generated from the proceeds of offerings of our equity securities and proceeds from one or more collaboration agreements as well as potentially through
royalty monetization, debt financing or the sale of other equity securities. However, we may not be successful in obtaining additional collaboration agreements, or in receiving milestone or royalty payments under those agreements. In addition, we
cannot be sure that our existing cash and investment resources will be adequate or that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or our stockholders. Having
insufficient funds may require us to delay or potentially eliminate some or all of our development programs, relinquish some or even all rights to product candidates at an earlier stage of development or negotiate less favorable terms than we would
otherwise choose. Failure to obtain adequate financing also may adversely affect the launch of our product candidates or our ability to continue in business. If we raise additional funds by issuing equity securities, substantial dilution to existing
stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to
operate our business.

Off-balance Sheet Arrangements

Since inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.



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Recently Issued Accounting Standards

Not Yet Adopted

In October 2009, the Financial Accounting Standards Board, or FASB issued Accounting Standards Update, or ASU, No. 2009-13, Revenue Recognition (Topic 605)  Multiple-Deliverable Revenue
Arrangements. This guidance modifies previous guidance for multiple element arrangements by requiring the use of the best estimate of selling price in the absence of vendor-specific objective evidence or third party evidence of
selling price for determining the selling price of a deliverable. In addition, the residual method of allocating arrangement consideration is no longer permitted. This ASU is effective for fiscal years beginning on or after June 15, 2010 and
early adoption is permitted. We are currently evaluating the impact of adopting this ASU on its financial position and results of operations.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, which adds disclosure
requirements about transfers in and out of Levels 1 and 2 and separates disclosures about activity relating to Level 3 measurements as well as clarifies input and valuation techniques. This Accounting Standards Update is effective for the first
reporting period beginning after December 15, 2009. We are currently evaluating the impact of adopting this ASU.

Adopted in 2009

In May 2009, the FASB issued Codification Topic 855, Subsequent Events, or Topic 855, which establishes general standards of accounting for, and requires disclosure of, events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. We adopted the provisions Topic 855 for the quarter ended June 30, 2009. The adoption of topic 855 did not have a material effect on our financial
position or results of operations.

In June 2009, the FASB issued ASU No. 2009-01, Generally Accepted Accounting
Principles,(Codification Topic 105) which establishes the FASB Accounting Standards Codification or the Codification, as the single source of authoritative U.S. generally accepted accounting principals, or GAAP. The Codification is not intended
to change GAAP, but it will change the way GAAP is organized and presented. The Codification was effective for the quarter ended September 30, 2009. The adoption of the Codification did not have a material effect on our financial position or
results of operations.

In December 2007, the FASB ratified Codification Topic 808, Collaborative Arrangements, or
Topic 808, which applies to collaborative arrangements where no separate legal entity exists and in which the parties are active participants and are exposed to significant risks and rewards that depend on the success of the activity. This issue,
among other things, requires certain statement of operations presentation of transactions with third parties and of payments between parties to the collaborative arrangement, along with disclosure about the nature and purpose of the arrangement. The
provisions of Topic 808 were effective for fiscal years beginning on or after December 15, 2008. We adopted Topic 808 on January 1, 2009. The adoption of Topic 808 did not have a material impact on our financial position or results of
operations.

On January 1, 2009, we adopted the provisions of Codification Topic 820, Fair Value Measurements and
Disclosures, or Topic 820, for non-financial assets and non-financial liabilities recognized or disclosed at fair value in the financial statements on a non-recurring basis The adoption of this guidance did not have a material impact on our
financial position or results of operations.



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PART III



|Item 11. | Executive Compensation
|-------- | ----------------------

Compensation Discussion and Analysis

Overview of Compensation Program

The Compensation Committee of the Board of Directors, referred to as the Committee throughout this
Compensation Discussion and Analysis, is responsible for establishing, implementing and monitoring adherence to the Companys compensation philosophy. The Committee ensures that the total compensation paid to the Companys executive
officers is fair, reasonable and competitive. The compensation programs for named executive officers are similar to those provided to other executive officers of the Company.

Compensation Philosophy and Objectives.

The Committee believes that
the most effective executive compensation program is one that is designed to reward achievement and that aligns its executives compensation with the interests of the Companys stockholders by rewarding achievement of goals and objectives
that the Committee believes are important to the long term creation of value in the Company. The Companys executive compensation program is designed to recruit and retain individuals with the skills necessary for the Company to achieve its
business objectives and to motivate and reward those individuals fairly over time with compensation programs that promote achievement of, and contribution to, those objectives. To that end, named executive officer compensation has three main
components: base compensation, or salary; annual bonus awards which are based upon specific goals and objectives to be established and approved by the Board of Directors; and stock option awards which may contain vesting acceleration features upon
attainment of specific operational goals which are predetermined by the Committee. In addition, the Company provides its named executive officers a variety of benefits that are generally available to all salaried employees. The Committee has not
adopted any formal or informal policies or guidelines for allocating compensation between long term and currently paid out compensation, between cash and non-cash compensation or among different forms of non-cash compensation. However, the
Committees philosophy is to have a significant portion of an employees compensation be performance-based while keeping base salary compensation at a competitive level.

Each element of compensation and the practices used to evaluate them are discussed in more detail below.

Benchmarking of Elements of Compensation.

The Committee believes it is important when making compensation-related decisions to be informed as to current practices of comparable companies in the life science industry. The Committee determines the
appropriate level for each compensation component based in part, but not exclusively, on competitive benchmarking consistent with recruiting and retention goals, the Committees view of internal equity and consistency, the Companys
overall performance and other considerations the Committee deems relevant. The Committee consults periodically with an independent outside compensation consulting firm retained by the Committee. As it makes decisions about executive compensation,
the Committee also obtains data from its consultant and from third party surveys regarding current compensation practices and trends among San Francisco Bay Area based companies in general and pharmaceutical and biosciences companies in particular,
and reviews this information with its consultant. The Committee also discusses various other compensation matters with its consultant, both during the course of the Committees regular meetings and in private meetings.



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During 2009, the Committee was advised by Setren Smallberg and Associates, Inc., an
independent executive compensation consulting firm. The Committee retained this firm in 2009 to advise on compensation matters related to the Companys management reorganization which affected three of the five named executives. During 2009 the
Company did not employ the compensation consultant to perform an overall compensation review for its executive management as such a review was performed during 2008. The peer companies considered in this reorganization review performed by Setren,
Smallberg & Associates, Inc., to support the Companys management reorganization using the executive compensation practices of a representative number of publicly-held companies in the life science industry (the Peer
Companies). The Peer Companies are:



| |  |  | Affymax, Inc.
| | - |  | -------------



| |  |  | Allos Therapeutics, Inc.
| | - |  | ------------------------



| |  |  | Barrier Therapeutics, Inc (now acquired by Stiefel Laboratories, Inc.)
| | - |  | ----------------------------------------------------------------------



| |  |  | Cell Therapeutics, Inc.
| | - |  | -----------------------



| |  |  | CombinatoRx Incorporated.
| | - |  | -------------------------



| |  |  | Cytokinetics Incorporated.
| | - |  | --------------------------



| |  |  | Dyax Corp.
| | - |  | ----------



| |  |  | Exelexis Inc.
| | - |  | -------------



| |  |  | Genomic Health Inc.
| | - |  | -------------------



| |  |  | Geron Corp.
| | - |  | -----------



| |  |  | Jazz Pharmaceuticals, Inc
| | - |  | -------------------------



| |  |  | Idenix Pharmaceuticals, Inc.
| | - |  | ----------------------------



| |  |  | La Jolla Pharmaceutical Company
| | - |  | -------------------------------



| |  |  | Oncogenxex Pharmaceuticals Inc.
| | - |  | -------------------------------



| |  |  | Rigel Pharmaceuticals, Inc
| | - |  | --------------------------



| |  |  | Sangamo BioSciences Inc.
| | - |  | ------------------------



| |  |  | ZymoGenetics, Inc.
| | - |  | ------------------

The Company purchases, or otherwise acquires, and reviews executive compensation surveys of companies in the life science and high technology industries in the San Francisco Bay Area in determining
appropriate compensation levels for the Companys employees, however, the only such surveys acquired for 2009 and 2010 compensation determinations were the Radford Surveys prepared in 2008 and 2009, respectively (referred to as the
Radford Surveys). The Committee intends to continue the Companys practice of engaging executive compensation consultants from time to time to aid in compensation related evaluations.



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Role of Named Executive Officers in Compensation Decisions.

The Chief Executive Officer aids the Committee by providing recommendations regarding the compensation of all named executive officers
other than himself. The Committee uses analyses of cash and equity compensation prepared by the Chief Executive Officer to establish general budgetary guidelines for aggregate annual employee cash compensation. These analyses typically include
evaluation of external benchmarks and surveys from such sources as Radford. For 2009, the Chief Executive Officer then allocated in his discretion among individual executives and employees on a case by case basis. The Committees 2010
compensation decisions were made in a similar fashion as discussed above in making the determination of named executive officer compensation. The Committee formally approved salary and stock option grants for the named executive officers including
the Chief Executive Officer. In addition, for compensation of named executive officers and employees other than the Chief Executive Officer, annual performance review of such officers or employees manager was conducted to provide input
about such individuals contributions to the Companys goals and objectives for the period being assessed. For the Chief Executive Officer, such review was conducted by the Committee. For compensation decisions regarding grants of equity
compensation, including vesting schedules and in some cases milestones providing for accelerated vesting if such milestones are achieved, relating to employees other than to our Chief Executive Officer, the Committee typically considers
recommendations from the Chief Executive Officer and other members of management. To date, Committee meetings typically have included, for all or a portion of each meeting, not only the committee members but also the Chief Executive Officer and
Chief Financial Officer.

Compensation Components

Base Compensation.

Generally, the Committee believes that base
salaries should be market driven, competitive to the San Francisco Bay Area marketplace and appropriately benchmarked, as described above, based on each executives experience, level and scope of responsibilities. The Committee targets base
compensation near the 50th percentile of the data derived from analysis of benchmarks, with specific emphasis on companies headquartered in the San Francisco Bay Area. The Committee sets this level to ensure that the Company is competitive in its
immediate job market, which the Committee believes helps to minimize potential competitive disadvantage and supports overall goals of recruitment and retention. Base salaries are generally reviewed annually, and the Committee seeks to set a Company
wide salary adjustment target percentage in line with general increases in the market, which the Committee believes has recently been in the 3% to 4% per year range. This target amount is also used to determine an overall salary increase budget
for employees across the Company. The final determination of the actual salary increase for each individual is based upon, for the Chief Executive Officer, the Companys performance and in addition, for other employees, the results of
performance reviews, responsibility and experience and potential alignment of each individuals salary in light of market data for similarly situated positions in similar companies.

Salary increases awarded to named executive officers effective January 1, 2009 were based upon performance of each of the named
executive officers in 2008 and on competitive data from third party sources. The base salaries effective January 1, 2009 after the increases were as follows:



| |  |  | Anthony A. DiTonno, President and Chief Executive Officer, $348,427,
| | - |  | --------------------------------------------------------------------



| |  |  | Stephen F. Ghiglieri, Chief Financial Officer, $310,000,
| | - |  | --------------------------------------------------------



| |  |  | Jeffrey K. Tobias, M.D. Chief Medical Officer, $332,100,
| | - |  | --------------------------------------------------------



| |  |  | Michael E. Markels, Vice President, Commercial Operations and Business Development, $260,000, and
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Susan P. Rinne, Regulatory Affairs, $262,500.
| | - |  | ---------------------------------------------



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Salary increases awarded to named executive officers effective January 1, 2010 were
based upon achievement of corporate objectives in 2009, additional roles and increased responsibilities for certain named executive officers, significant performance in certain areas of responsibility, and market comparisons of salary levels for the
San Francisco Bay Area life science industry. The Committee noted that the Company had out-performed the Committees expectations on 2009 corporate objectives and that salary increases should therefore provide a financial reward above the 3% to
4% average annual salary increases reflected in the marketplace based on a high level of achievement. The 2010 salary increases as a percentage of 2009 base salary, and the additional considerations of the Committee for each named executive officer,
were as follows:



| |  |  | Anthony A. DiTonno, President, Chief Executive Officer, received a 22.0% increase. The increase reflected Mr. DiTonnos overall
responsibility for the high level of achievement of the Company in 2009, and his management of the Companys successful efforts to enable commercialization of Qutenza. It was also noted that Mr. DiTonnos responsibilities for the
Company would increase as a result of the shift of the Companys operations from research and development to commercialization.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Stephen F. Ghiglieri, Executive Vice President, Chief Operating Officer, Chief Financial Officer, received a 9.7% increase. The increase reflected
Mr. Ghiglieris undertaking expanded responsibilities in 2009, and his significant role in establishing the Companys commercial partnership with Astellas and managing the Companys operations under budget and utilizing lower
than expected cash resources.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Jeffrey K. Tobias, M.D., Executive Vice President, Research and Development, Chief Medical Officer, received an 8.4% increase. The increase reflected
Mr. Tobias undertaking expanded responsibilities in 2009 and his leadership role in obtaining marketing approval for Qutenza in the United States and the European Union.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Michael E. Markels, Senior Vice President, Commercial and Business Development, received a 9.6% increase. The increase reflected the significant
increase of Mr. Markels expected responsibilities as the Company ramped up post-approval commercialization efforts for Qutenza, and Mr. Markels significant role in establishing the Companys commercial partnership with Astellas.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Susan P. Rinne, Vice President, Regulatory Affairs, received a 6.0% increase. The increased reflected Ms. Rinnes instrumental role in
obtaining marketing approval for Qutenza in the United States and the European Union.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Committee
otherwise targeted an approximate overall 4% salary increase for 2010 base salaries for all employees which it believes, based upon a review of the benchmarking data, was representative of overall increases in the Companys local market.

Bonus Compensation.

The Company also rewards individual as well as corporate performance through the implementation of a performance bonus plan. Bonuses are paid to employees based on attainment of specific corporate goals
which are established in consultation with the Committee, such as achievement of financial, operational, clinical, regulatory milestones, corporate partnering goals and adherence to operating budgets, as well as individual goals agreed to in advance
with the employees manager. Individual goals are designed to support the attainment of the specified corporate goals.

In conjunction with the review performed by the third party executive compensation consultant that was engaged to assist the Committee,
the Committee determined that an annual bonus program is a key feature of the overall compensation programs for public biotechnology companies. In addition to a desire to have compensation programs that are competitive in the market, the Committee
believes that the Companys



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compensation programs should provide a performance incentive that aligns executives and other employees interests with those of stockholders. As a result, the Committee has undertaken
efforts to create an annual bonus program. In these efforts to date, the Committee has determined the target bonuses for the executives as percentages of base salary. These percentages for the calendar year 2009 were as follows:



| |  |  | Anthony A. DiTonno, 50%,
| | - |  | ------------------------



| |  |  | Stephen F. Ghiglieri, 25%,
| | - |  | --------------------------



| |  |  | Jeffrey K. Tobias, M.D., 25%,
| | - |  | -----------------------------



| |  |  | Michael E. Markels, 20%, and
| | - |  | ----------------------------



| |  |  | Susan P. Rinne, 20%.
| | - |  | --------------------

The Committee also determined the following as the 2009 corporate objectives under the 2009 bonus plan:



| |  |  | Obtain a positive EMEA decision on the European Union MAA for Qutenza (without regard to whether a broad or narrow label for Qutenza is recommended for
approval) indicating that marketing approval is attainable without significant additional time or investment required.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Enter into an agreement with a commercial partner to commercialize Qutenza either in the United States, European Union or worldwide.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Obtain from the FDA a complete response letter indicating that marketing approval of Qutenza is attainable without significant additional time or
investment required.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Retain financial resources to support commercial launch of Qutenza by the Company after FDA approval and meet the Companys cash needs for the
duration of 2010.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Carry out Company operations within the Companys approved budget for 2009.
| | - |  | ---------------------------------------------------------------------------

Each of the five corporate objectives was given a weight of 20% for evaluation of achievement for bonus determination purposes. The
Committee did not establish any quantitative criteria with respect to achievement of the 2009 corporate objectives and there were no individual performance goals established for named executive officers under the 2009 bonus plan. All bonus
determinations for named executive officers were expected to be made on the basis of overall achievement of corporate objectives as determined by the Committee.

In January 2010, the Committee evaluated the Companys progress against 2009 corporate objectives and recommended to the Board of Directors the establishment of a bonus pool. Based upon the
committees evaluation of the attainment of corporate objectives, while noting that the Chief Executive Officer and named executive officers had all significantly contributed to the attainment of those objectives, the Committee recommended to
the Board of Directors the amount of bonus to be paid to the Chief Executive Officer and each of the other named executive officers. In its evaluation of 2009 corporate objective achievement, the Committee noted that the Companys performance
significantly exceeded the original expectations set forth in four of the corporate objectives listed above as follows:



| |  |  | The Company received marketing approval for Qutenza from the European Commission in 2009 based on the EMEAs recommendation, which included a
broad label (treatment of peripheral neuropathic pain in non-diabetic adults), with post-approval clinical development funded by the Companys commercial partner.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | The Company entered into a commercial partnership with Astellas for commercialization of Qutenza in the European Union and certain other countries.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company received marketing approval for Qutenza from the FDA for the management of neuropathic pain associated with PHN, without extra
post-approval requirements.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company carried out its operations under budget, with favorable variances both with respect to expenses for 2009 and cash resources remaining at
the end of 2009.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the fifth corporate objective, retention of financial resources to support launch of
Qutenza and 2010 cash needs, it was noted that the corporate objective had been fully met.

In recognition of these key
accomplishments in 2009, the Committee recommended bonuses of 125% to 150% of the target bonuses identified above, with at least 100% of the target bonus amount paid in cash. Further, based on relative contributions of each of the named executive
officers and in the interest of preserving the Companys cash resources, the Committee recommended that certain of the named executive officers receive the portion of their annual bonus exceeding approximately 100% of their target bonus amount
in fully vested stock options. With regard to the stock options granted for the noncash component of the 2009 bonus, the number of shares underlying these stock options was determined by dividing the remaining unpaid cash bonus by the Companys
closing stock price on January 15, 2010, multiplied by a factor of two. The Companys closing stock price on January 14, 2010, which was also the exercise price of these stock options, was $7.10. Cash bonuses and the number of shares
underlying the stock options paid to named executive officers in January 2010 and granted to named executive officers on January 14, 2010, respectively, for 2009 performance were:



| |  |  | Anthony A. DiTonno, $183,840 cash payment and 12,291 shares,
| | - |  | ------------------------------------------------------------



| |  |  | Stephen F. Ghiglieri, $77,500 cash payment and 5,457 shares,
| | - |  | ------------------------------------------------------------



| |  |  | Michael E. Markels, $52,000 cash payment and 3,661 shares,
| | - |  | ----------------------------------------------------------



| |  |  | Jeffrey K. Tobias, M.D., $103,781 cash payment, and
| | - |  | ---------------------------------------------------



| |  |  | Susan P. Rinne, $78,750, cash payment.
| | - |  | --------------------------------------

The option grants set forth above were 100% vested on the date of grant, January 14, 2010.

The Committee also recommended, and the Board of Directors approved, certain corporate objectives as a basis for establishment of the 2010 Bonus Plan as well as target bonus percentages for the named
executive officers. The target bonus percentages for Messrs. Ghiglieri and Markels and Dr. Tobias were increased from the prior year amounts in recognition of the increased roles that each such executive had undertaken in their respective areas
of responsibility as a result of the Company moving into commercial operations. Target bonus percentages for Mr. DiTonno and Ms. Rinne were considered to be in line with the marketplace and their levels of responsibility and therefore
remain unchanged from those in place for the prior year. The percentages for the calendar year 2010 are as follows:



| |  |  | Anthony A. DiTonno, 50%,
| | - |  | ------------------------



| |  |  | Stephen F. Ghiglieri, 35%,
| | - |  | --------------------------



| |  |  | Jeffrey K. Tobias, M.D., 35%,
| | - |  | -----------------------------



| |  |  | Michael E. Markels, 30%, and
| | - |  | ----------------------------



| |  |  | Susan P. Rinne, 20%.
| | - |  | --------------------



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The amount of the 2010 target bonus to be paid to the named executive officers will be
determined on the basis of achievement of corporate goals in 2010. These goals include certain financial, operational, regulatory, clinical and corporate partnering goals.

Equity Awards.

The Committee believes that the Companys
compensation programs should provide the opportunity for wealth creation for the Companys executives and all employees in a manner that aligns their interests with those of stockholders in the creation of long term value through the
Companys success. The Company utilizes stock options to provide incentives to its named executive officers to help achieve this goal. Because the named executive officers are awarded stock options with an exercise price equal to the fair
market value of the Companys Common Stock on the date of grant, these options will be valuable to these named executive officers only if the market price of the Companys Common Stock increases after the date of grant. The
Committees equity award determinations are based upon market data such as the Radford Surveys, the experience of members of the Committee and the Board of Directors and (with the exception of the Chief Executive Officers equity awards)
the recommendations of the Chief Executive Officer with a general goal to maintain option granting and executive equity practices near the 50th percentile of the data derived from analysis of benchmarks, with specific emphasis on such companies
headquartered in the San Francisco Bay Area.

All new employees, including the Companys named executive officers,
receive stock option grants when they are hired. The number of shares underlying stock option grants for new hires is intended to be competitive in the Companys industry and its local market and is used as a recruiting tool as the Committee
believes that equity compensation is a significant consideration for employees decisions to accept employment offers with the Company, particularly for named executive officers. Typically, stock option grants to new employees vest at the rate
of 25% after the first year of service with the remainder vesting ratably over the subsequent 36 months, although some executive new hires in recent years have also contained vesting acceleration provisions related to attainment of key corporate
objectives, such as clinical development and regulatory objectives for our product candidates and other operational and business goals. In addition, the Committee generally reviews the Companys equity compensation programs annually, with a
view to ensuring that the Companys named executive officers and employees continue to have a meaningful stake in the Companys long term success. To that end, annual stock option grants to named executive officers have in recent years
contained two components: a time based vesting component (usually, monthly vesting over 48 months) and a component that vests on the six year anniversary of the grant subject to acceleration of vesting based upon attainment of key corporate
objectives, determined as described above. The Committee and the Board of Directors also grant equity awards from time to time for what are considered highly significant corporate achievements. Such awards are generally vested in full on the date of
grant. The size of such awards is less subject to benchmarking and other processes noted above than it is to general notions of what the Committee or Board of Directors considers suitable under the circumstances given the importance of the
achievement and the contributions of the individuals involved with such achievement. After assessment by the Committee, all option grants are recommended to the Board of Directors for ultimate approval.

Since becoming a public company in May 2007, all stock options granted to named executive officers have an exercise price per share
equal to the closing price of the Companys Common Stock on the date of grant. Prior to becoming a public company, the Board of Directors determined the value of the Companys Common Stock based upon the consideration of several factors
impacting the Companys valuation including, when available, independently developed contemporaneous valuations of the Company.

In January 2009, the Committee recommended, and the Board of Directors approved, stock option grants to our named executive officers as follows:



| |  |  | Anthony A. DiTonno, 50,000 shares,
| | - |  | ----------------------------------



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| |  |  | Stephen F. Ghiglieri, 30,000 shares,
| | - |  | ------------------------------------



| |  |  | Jeffrey K. Tobias, M.D., 30,000 shares,
| | - |  | ---------------------------------------



| |  |  | Michael E. Markels, 25,000 shares, and
| | - |  | --------------------------------------



| |  |  | Susan P. Rinne, 30,000 shares.
| | - |  | ------------------------------

The number of shares underlying such options and vesting terms were determined based upon the Committees review of the Companys achievement of corporate objectives in 2008, a review of equity
ownership similarly situated executives in the marketplace (with a view toward maintenance of executive equity ownership at approximately the 50th percentile), a general sense of the marketplace as determined in the discretion of the Committee and
the desire of the Committee to provide incentives for management retention and achievement of important corporate objectives. Of these option grants, 50% of the options vest evenly over 48 months and the remaining 50% vest over six years subject to
acceleration for attainment of certain regulatory and commercialization objectives for the Companys product candidates and other operational and business goals.

In January 2009, and in an effort to conserve the Companys cash resources, the Committee also recommended, and the Board of Directors approved, stock option grants to the named executive
officer as 50% of the payment to such officers under the Companys 2008 cash bonus plan. The individual grants amounts were determined by dividing the unpaid portion of the 2008 cash bonus by the Companys closing stock price on
January 15, 2009, multiplied by a factor of two. The Companys closing stock price on January 15, 2009 was $1.25. The number of shares granted the named executive officers in connection with the 2008 cash bonus plan were as follows:



| |  |  | Anthony A. DiTonno, 80,000 shares,
| | - |  | ----------------------------------



| |  |  | Stephen F. Ghiglieri, 29,520 shares,
| | - |  | ------------------------------------



| |  |  | Jeffrey K. Tobias, M.D., 60,000 shares,
| | - |  | ---------------------------------------



| |  |  | Michael E. Markels, 20,000 shares, and
| | - |  | --------------------------------------



| |  |  | Susan P. Rinne, 20,000 shares.
| | - |  | ------------------------------

These option grants were fully vested on the date of grant.

In July 2009,
the Committee recommended, and the Board of Directors approved, stock option grants to the named executive officers as follows:



| |  |  | Anthony A. DiTonno, 35,000 shares,
| | - |  | ----------------------------------



| |  |  | Stephen F. Ghiglieri, 20,000 shares, and
| | - |  | ----------------------------------------



| |  |  | Michael E. Markels, 30,000 shares.
| | - |  | ----------------------------------

These option grants were fully vested on the date of grant, with the amount of such grants based on the Committees general discretion, the relative contributions of Messers DiTonno, Ghiglieri
and Markels in consummating the Astellas Agreement and the importance of the achievement of such objective.

In
November 2009, the Board of Directors approved a stock option grant of 25,000 shares to Ms. Rinne to reward her for her relative contribution in connection with the approval of Qutenza by the FDA. This option grant was fully vested on the
date of grant.



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In December 2009, the Board of Directors approved a stock option grant of 1,000 shares
to employees of the Company in general in connection with the approval of Qutenza by the FDA, which included a 1,000 share grant to each of Messrs. DiTonno, Ghiglieri and Markels, Dr. Tobias and Ms. Rinne. These option grants were fully
vested on the date of grant.

In January 2010, the Committee recommended, and the Board of Directors approved, stock
option grants to the named executive officers as follows:



| |  |  | Anthony A. DiTonno, 80,000 shares,
| | - |  | ----------------------------------



| |  |  | Stephen F. Ghiglieri, 60,000 shares,
| | - |  | ------------------------------------



| |  |  | Jeffrey K. Tobias, M.D., 50,000 shares,
| | - |  | ---------------------------------------



| |  |  | Michael E. Markels, 30,000 shares, and
| | - |  | --------------------------------------



| |  |  | Susan P. Rinne, 20,000 shares.
| | - |  | ------------------------------

These option grants vest evenly over 48 months and the number of shares underlying such options and vesting terms were determined based upon the Committees review of the Companys performance
in 2009, a review of equity ownership similarly situated executives among Peer Companies (with a view toward maintenance of executive equity ownership at approximately the 50th percentile), the increased responsibility of Messrs. Ghiglieri and
Markels and Dr. Tobias in 2010, a general sense of the marketplace as determined in the discretion of the Committee and the desire of the Committee to provide incentives for management retention.

Severance and Change of Control Payments.

All of the Companys named executive officers are entitled to severance payments equal to from 6 to 12 months of base salary, target bonus and full acceleration of stock option and restricted stock
vesting if the named executive officers employment is terminated without cause by an acquiring company, or, for certain reasons, by the named executive officer, within 18 months following a change of control of the Company. In addition, and
upon a change of control, certain of the Companys named executive officers are entitled to receive a bonus determined under the 2006 Acquisition Bonus Plan, as amended in December 2008. The Committee believes that these severance and change of
control arrangements mitigate some of the risk that exists for executives working in a smaller company. These arrangements are intended to attract and retain qualified executives that could have other job alternatives that may appear to them to be
less risky absent these arrangements. Because of the significant acquisition activity in the life science industry, there is a possibility that the Company could be acquired in the future. Accordingly, the Committee believes that the larger
severance packages resulting from terminations related to change of control transactions, and bonus and vesting packages relating to the change of control itself, will provide an incentive for these executives to continue to help successfully
execute such a transaction from its early stages until closing. These arrangements were amended in 2008 to comply with U.S. tax laws, including regulations promulgated under Section 409A of the Internal Revenue Code of 1986, as amended, by
updating, certain terms and conditions related to the timing of severance or other payments. For a description and quantification of these severance and change of control benefits, please see the section entitled Potential Payments Upon
Termination or Change of Control.

Other Benefits.

Executive officers are eligible to participate in all of the Companys employee benefit plans, such as medical, dental, vision, group
life, disability, and accidental death and dismemberment insurance, employee stock purchase and 401(k) plans, in each case on the same basis as other employees, subject to applicable law. The Company also provides vacation and other paid holidays to
all employees, including its named executive officers, at levels that the Committee believes are consistent with the practices of companies in the Companys industry and local market. It is generally the Companys policy not to extend
significant perquisites to its named executive officers that are not available to its employees.



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Report of the Compensation Committee of the Board of Directors

The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b)
of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.



Respectfully Submitted By:MEMBERS OF THE COMPENSATION
COMMITTEENeil Kurtz, M.D., Compensation Committee ChairJean-Jacques BienaiméRobert T. Nelsen


Dated: April 19, 2010

Executive Compensation

The following table provides information regarding the compensation of the Companys named executive officers, during the fiscal year ended December 31, 2009. The Company refers to these
executive officers as the named executive officers.

Summary Compensation Table



|                            |  |      |              |  |            |     |                         |       |  |   |                  |  |  |                                         |                        |  |                          |     |                  |       |  |      |                    |  |  |      |                         | 
|--------------------------- |  | ---- | ------------ |  | ---------- | --- | ----------------------- | ----- |  | - | ---------------- |  |  | --------------------------------------- | ---------------------- |  | ------------------------ | --- | ---------------- | ----- |  | ---- | ------------------ |  |  | ---- | ----------------------- | 
|Name and Principal Position |  | Year |              |  | Salary (1) |     |                         | Bonus |  |   | OptionGrants (2) |  |  | Non-EquityIncentive PlanCompensation(3) |                        |  | All OtherCompensation(4) |     |                  | Total | 
|Anthony A. DiTonno          |  |      | 200920082007 |  |            | $$$ | 348,427317,750 300,000  |       |  | $ | 
48,750        |  |  | $ $                                     | 292,993  577,444      |  |                          | $$  | 183,840 50,000  |       |  | $$ $ | 3,7797,273
135,519 |  |  | $$$  | 829,038375,0231,061,713 | 
|Stephen F. Ghiglieri        |  |      | 200920082007 |  |            | $$$ | 310,000 295,200 277,200 |       |  | $ | 
34,650        |  |  | $$ $                                    | 158,147 87,343 203,399 |  |                          | $$  | 77,500 18,450   |       |  | $$ $ | 3,2625,183
21,511  |  |  | $$ $ | 548,909406,176
536,760  | 
|Jeffrey Tobias, M.D.,       |  |      | 200920082007 |  |            | $$$ | 332,100 316,250 299,250 |       |  | $ | 
37,406        |  |  | $$ $                                    | 76,29787,343
203,399   |  |                          | $$$ | 103,781 37,500  |       |  | $$ $ | 3,5987,055
5,963   |  |  | $$ $ | 515,776448,148
546,018  | 
|Michael E. Markels          |  |      | 200920082007 |  |            | $$$ | 260,000 250,000 234,000 |       |  | $ | 
23,400        |  |  | $ $                                     | 199,639  87,479       |  |                          | $$$ | 52,000 12,500   |       |  | $$$  | 3,20225,03941,718  |  |  | $$ $ | 514,841287,539
386,597  | 
|Susan P. Rinne(5)           |  |      | 200920082007 |  |            | $$$ | 262,500 250,000 67,307  |       |  | $ | 
6,250         |  |  | $ $                                     | 182,472  284,410      |  |                          | $$$ | 78,750 12,500   |       |  | $$ $ | 3,5985,552
50,902  |  |  | $$ $ | 527,320268,052
408,869  | 



|(1) | The amounts in this column include payments in respect of accrued vacation, holidays, and sick days.
|--- | ----------------------------------------------------------------------------------------------------

|(2) | The amounts in this column represent the aggregate grant date fair value of awards granted during the year computed in accordance with FASB Codification Topic 718.
Assumptions used in calculating the valuation of option grants are described in Note 9 to the Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 19, 2010.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The amounts in this column represent payments pursuant to the Companys incentive bonus plan based upon the Board of Directors determination of milestone
attainment in 2009. The amount reported for 2009 reflects the cash portion of the bonus payout for services performed in 2009. In addition to this cash portion of the 2009 bonus payment, certain stock options were granted in lieu of the remaining
cash portion. See Compensation Discussion and Analysis  Compensation Components  Bonus Compensation in this proxy for the terms, and number of shares underlying, these stock options.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(4) | The amounts in this column include amounts for forgiveness of notes receivable, housing allowance, discount purchase of securities through the Companys 2007 Stock
Purchase Plan, moving expense reimbursement, term insurance premiums and a sign-on bonus.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Ms. Rinne joined the Company as Vice President, Regulatory Affairs in September 2007. Accordingly, the salary amount with respect to fiscal year ended
December 31, 2007 reflects the amount she was paid during that year for services she performed as Vice President, Regulatory Affairs.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Grants of Plan-Based Awards

The following table provides information
regarding grants of plan-based awards to each of the named executive officers during the fiscal year ended December 31, 2009. All options were granted at the fair market value of the Companys Common Stock, as determined by the
Companys Board of Directors on the date of grant and were granted under the Companys 2007 Stock Plan.



|                     |  |            |            |     |                                                                 |   |         |                                                                |  |  |                                             |  |  |   |      | 
|-------------------- |  | ---------- | ---------- | --- | --------------------------------------------------------------- | - | ------- | -------------------------------------------------------------- |  |  | ------------------------------------------- |  |  | - | ---- | 
|Name                 |  | Grant Date |            |     | Estimated Possible PayoutsUnder Non-EquityIncentive Plan Awards |   |         | All Other Option Grants:Number of SecuritiesUnderlying Options |  |  | Exercise Price or BasePrice ofOption Awards | 
|                     |  | Target (1) |            |     |                                                                
|Anthony A. DiTonno   |  |            |           |     |                                                                 |   | 183,480 |                                                                |  |  |                                            |  |  |   |     | 
|                     |  |            | 1/15/2009  | (2) |                                                                 | $ |        |                                                                |  |  | 80,000                                      |  |  | $ | 1.25 | 
|                     |  |            | 1/15/2009  | (3) |                                                                 |   |         |                                                                |  |  | 50,000                                      |  |  | $ | 1.25 | 
|                     |  |            | 7/29/2009  | (2) |                                                                 |   |         |                                                                |  |  | 35,000                                      |  |  | $ | 8.50 | 
|                     |  |            | 12/3/2009  | (2) |                                                                 |   |         |                                                                |  |  | 1,000                                       |  |  | $ | 8.32 | 
|Stephen F. Ghiglieri |  |            |           |     |                                                                 |   | 77,500  |                                                                |  |  |                                            |  |  |   |     | 
|                     |  |            | 1/15/2009  | (2) |                                                                 |   |        |                                                                |  |  | 29,520                                      |  |  | $ | 1.25 | 
|                     |  |            | 1/15/2009  | (3) |                                                                 |   |         |                                                                |  |  | 30,000                                      |  |  | $ | 1.25 | 
|                     |  |            | 7/29/2009  | (2) |                                                                 |   |        |                                                                |  |  | 20,000                                      |  |  | $ | 8.50 | 
|                     |  |            | 12/3/2009  | (2) |                                                                 |   |        |                                                                |  |  | 1,000                                       |  |  | $ | 8.32 | 
|Jeffrey Tobias, M.D. |  |            |           |     |                                                                 | $ | 83,025  |                                                                |  |  |                                            |  |  |   |     | 
|                     |  |            | 1/15/2009  | (2) |                                                                 |   |         |                                                                |  |  | 60,000                                      |  |  | $ | 1.25 | 
|                     |  |            | 1/15/2009  | (3) |                                                                 |   |         |                                                                |  |  | 30,000                                      |  |  | $ | 1.25 | 
|                     |  |            | 12/3/2009  | (2) |                                                                 |   |        |                                                                |  |  | 1,000                                       |  |  | $ | 8.32 | 
|Michael E. Markels   |  |            |           |     |                                                                 |   | 52,000  |                                                                |  |  |                                            |  |  |   |     | 
|                     |  |            | 1/15/2009  | (2) |                                                                 |   |        |                                                                |  |  | 20,000                                      |  |  | $ | 1.25 | 
|                     |  |            | 1/15/2009  | (3) |                                                                 |   |        |                                                                |  |  | 25,000                                      |  |  | $ | 1.25 | 
|                     |  |            | 7/29/2009  | (2) |                                                                 |   |        |                                                                |  |  | 30,000                                      |  |  | $ | 8.50 | 
|                     |  |            | 12/3/2009  | (2) |                                                                 |   |        |                                                                |  |  | 1,000                                       |  |  | $ | 8.32 | 
|Susan P. Rinne       |  |            |           |     |                                                                 | $ | 52,500  |                                                                |  |  |                                            |  |  |   |     | 
|                     |  |            | 1/15/2009  | (2) |                                                                 |   |        |                                                                |  |  | 20,000                                      |  |  | $ | 1.25 | 
|                     |  |            | 1/15/2009  | (3) |                                                                 |   |        |                                                                |  |  | 30,000                                      |  |  | $ | 1.25 | 
|                     |  |            | 11/19/2009 | (2) |                                                                 |   |        |                                                                |  |  | 25,000                                      |  |  | $ | 8.38 | 
|                     |  |            | 12/3/2009  | (2) |                                                                 |   |        |                                                                |  |  | 1,000                                       |  |  | $ | 8.32 | 



|(1) | The amounts in this column represent the target amounts of bonuses payable under the Companys incentive bonus plan. The target amount represents the total amount
that was potentially payable in cash. The actual amounts paid, which were comprised of a 50% payout in cash and stock options in lieu of the remaining cash portion, are set forth in Compensation Discussion and Analysis  Compensation
Components  Bonus Compensation in this proxy.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | One Hundred percent (100%) of the shares subject to the option vest and became exercisable upon grant
|--- | -----------------------------------------------------------------------------------------------------

|(3) | In connection with 50% of shares subject to option, the achievement of certain performance criteria provides for acceleration of vesting in five equal installments of
20% each. Notwithstanding the acceleration vesting provision, 50% of the option would be 100% vested on January 15, 2015. In connection with the remaining 50% of shares subject to option, the option vests in forty-eight equal monthly
installments beginning on February 15, 2009.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employment Agreements

The Company has entered into executive employment agreements with each of its named executive officers: Anthony DiTonno, Stephen
Ghiglieri, Jeffrey Tobias, Michael Markels and Susan Rinne.

The agreements provide for these officers to remain the
Companys at-will employees and to receive salary, bonus and benefits as determined at the discretion of the Board of Directors. The Companys agreements with these officers provide that in the event of a change of control, certain limited
acceleration of vesting periods for unvested stock options occurs. In addition, these agreements provide additional benefits if within the eighteen month period following a change of control of the company they resign for good reason or are
terminated by the Company or its successor other than for cause. These agreements were amended and restated in 2008 to comply with U.S. tax laws, including regulations promulgated under Section 409A of the Internal Revenue Code of 1986, as
amended, by updating certain terms and conditions related to the timing of severance payments.



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Upon a qualifying resignation or termination, Mr. DiTonno, will become entitled to
receive: continuing severance payments at a rate equal to his base salary for a period of twelve months; a lump sum payment equal to his full target annual bonus; acceleration in full of vesting of options for Common Stock held by him; the lapse in
full of the Companys right of repurchase with respect to restricted shares of Common Stock held by him; and continued employee benefits until the earlier of twelve months following the date of termination or resignation or the date he obtains
employment with generally similar employee benefits.

Upon a qualifying resignation or termination, Messrs. Ghiglieri,
Dr. Tobias and Markels will become entitled to receive continuing severance payments at a rate equal to their base salaries for a period of nine months; lump sum payments equal to their full target annual bonuses; acceleration in full of
vesting of options for Common Stock held by them; the lapse in full of the Companys right of repurchase with respect to restricted shares of Common Stock held by them; and continued employee benefits until the earlier of nine months following
the date of termination or resignation or the date they obtain employment with generally similar employee benefits.

Upon a
qualifying resignation or termination, Ms. Rinne will become entitled to receive continuing severance payments at a rate equal to her base salary for a period of six months; lump sum payments equal to 50% of her target annual bonus;
acceleration of vesting of 50% of options for Common Stock held by her; and continued employee benefits until the earlier of nine months following the date of termination or resignation or the date that she obtains employment with generally similar
employee benefits.

For a complete description and quantification of benefits payable to the Companys named officers on
and following termination of employment under plans and programs currently in effect, see Potential Payments Upon Termination Or Change In Control.

Outstanding Equity Awards

The following table presents certain
information concerning the outstanding option awards held as of December 31, 2009 by each named executive officer.



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|                     |  |                                                    |         |        |                     |  |        |                      |  |  |       |  |  |  |            | 
|-------------------- |  | -------------------------------------------------- | ------- | ------ | ------------------- |  | ------ | -------------------- |  |  | ----- |  |  |  | ---------- | 
|                     |  | Number of Securities UnderlyingUnexercised Options |         |        | OptionExercisePrice |  |        | OptionExpirationDate | 
|Name                 |  | Exercisable                                        |         |        | Unexercisable       |  |        |                     
|Anthony A. DiTonno   |  |                                                    | 64,999  |        |                     |  |       |                      |  |  | 2.70  |  |  |  | 4/28/2014  | 
|                     |  |                                                    | 27,260  | (2)    |                     |  |       |                      |  |  | 1.95  |  |  |  | 3/15/2015  | 
|                     |  |                                                    | 27,260  | (1)    |                     |  |       |                      |  |  | 1.95  |  |  |  | 3/15/2015  | 
|                     |  |                                                    | 21,941  | (1)(5) |                     |  |       |                      |  |  | 3.75  |  |  |  | 3/14/2016  | 
|                     |  |                                                    | 10,000  | (1)(5) |                     |  |       |                      |  |  | 11.25 |  |  |  | 1/4/2017   | 
|                     |  |                                                    | 20,001  |        |                     |  | 11,999 | (1)                  |  |  | 8.63  |  |  |  | 10/2/2017  | 
|                     |  |                                                    | 27,000  |        |                     |  | 21,000 | (2)                  |  |  | 8.63  |  |  |  | 10/2/2017  | 
|                     |  |                                                    | 110,729 |        |                     |  | 19,271 | (3)                  |  |  | 1.25  |  |  |  | 1/15/2019  | 
|                     |  |                                                    | 35,000  |        |                     |  |       |                      |  |  | 8.50  |  |  |  | 7/29/2019  | 
|                     |  |                                                    | 1,000   |        |                     |  |       |                      |  |  | 8.32  |  |  |  | 12/3/2019  | 
|Stephen F. Ghiglieri |  |                                                    | 18,266  |        |                     |  |       |                      |  |  | 2.70  |  |  |  | 4/28/2014  | 
|                     |  |                                                    | 18,266  | (1)    |                     |  |       |                      |  |  | 2.70  |  |  |  | 4/28/2014  | 
|                     |  |                                                    | 10,134  | (2)    |                     |  |       |                      |  |  | 1.95  |  |  |  | 3/15/2015  | 
|                     |  |                                                    | 10,134  | (1)    |                     |  |       |                      |  |  | 1.95  |  |  |  | 3/15/2017  | 
|                     |  |                                                    | 8,166   | (1)(5) |                     |  |       |                      |  |  | 3.75  |  |  |  | 3/15/2016  | 
|                     |  |                                                    | 5,000   | (1)(5) |                     |  |       |                      |  |  | 11.25 |  |  |  | 1/5/2017   | 
|                     |  |                                                    | 10,000  | (1)    |                     |  |       |                      |  |  | 8.63  |  |  |  | 10/2/2017  | 
|                     |  |                                                    | 4,687   |        |                     |  | 10,313 | (2)                  |  |  | 8.63  |  |  |  | 10/2/2017  | 
|                     |  |                                                    | 11,978  |        |                     |  | 13,022 | (2)                  |  |  | 5.43  |  |  |  | 1/10/2018  | 
|                     |  |                                                    | 25,383  |        |                     |  | 11,563 | (1)                  |  |  | 1.25  |  |  |  | 1/15/2019  | 
|                     |  |                                                    | 20,000  |        |                     |  |       |                      |  |  | 8.50  |  |  |  | 7/29/2019  | 
|                     |  |                                                    | 1,000   |        |                     |  |       |                      |  |  | 8.32  |  |  |  | 12/3/2019  | 
|                     |  |                                                    | 22,574  |        |                     |  |       |                      |  |  | 1.25  |  |  |  | 1/15/2019  | 
|Jeffrey Tobias, M.D. |  |                                                    | 86,666  |        |                     |  |       |                      |  |  | 3.75  |  |  |  | 1/27/2016  | 
|                     |  |                                                    | 5,000   | (1)(5) |                     |  |       |                      |  |  | 11.25 |  |  |  | 1/4/2017   | 
|                     |  |                                                    | 10,000  |        |                     |  |       |                      |  |  | 8.63  |  |  |  | 10/2/2007  | 
|                     |  |                                                    | 4,687   |        |                     |  | 10,313 | (2)                  |  |  | 8.63  |  |  |  | 10/2/2017  | 
|                     |  |                                                    | 11,978  |        |                     |  | 13,022 | (2)                  |  |  | 5.43  |  |  |  | 1/9/2018   | 
|                     |  |                                                    | 56,437  |        |                     |  | 11,563 | (3)                  |  |  | 1.25  |  |  |  | 1/15/2019  | 
|                     |  |                                                    | 1,000   |        |                     |  |       |                      |  |  | 8.32  |  |  |  | 12/3/2019  | 
|Michael E . Markels  |  |                                                    | 8,666   | (4)(5) |                     |  |       |                      |  |  | 3.75  |  |  |  | 6/2/2016   | 
|                     |  |                                                    | 27,333  | (3)(5) |                     |  |       |                      |  |  |      |  |  |  | 6/26/2016  | 
|                     |  |                                                    | 30,666  | (1)(5) |                     |  |       |                      |  |  | 4.20  |  |  |  | 9/21/2016  | 
|                     |  |                                                    | 2,500   | (1)(5) |                     |  |       |                      |  |  | 11.25 |  |  |  | 1/5/2017   | 
|                     |  |                                                    | 4,000   |        |                     |  |       |                      |  |  | 8.63  |  |  |  | 10/2/2017  | 
|                     |  |                                                    | 1,875   |        |                     |  | 4,125  | (2)                  |  |  | 8.63  |  |  |  | 10/2/2017  | 
|                     |  |                                                    | 35,364  |        |                     |  | 9,636  | (3)                  |  |  | 1.25  |  |  |  | 1/16/2019  | 
|                     |  |                                                    | 30,000  |        |                     |  |       |                      |  |  | 8.50  |  |  |  | 7/30/2019  | 
|                     |  |                                                    | 1,000   |        |                     |  |       |                      |  |  | 8.32  |  |  |  | 12/4/2019  | 
|Susan P. Rinne       |  |                                                    | 28,124  |        |                     |  | 2,1876 | (3)                  |  |  | 8.63  |  |  |  | 10/2/2017  | 
|                     |  |                                                    | 38,437  |        |                     |  | 11,563 | (3)                  |  |  | 1.25  |  |  |  | 1/15/2019  | 
|                     |  |                                                    | 25,000  |        |                     |  |       |                      |  |  | 8.38  |  |  |  | 11/19/2019 | 
|                     |  |                                                    | 1,000   |        |                     |  |       |                      |  |  | 8.32  |  |  |  | 12/3/2019  | 



|(1) | Vests in full on the sixth anniversary of the grant date. The vesting will accelerate upon the attainment by the Company of certain milestones.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Vests as to 1/48 of the shares underlying the option monthly following the grant date.
|--- | --------------------------------------------------------------------------------------

|(3) | Vests as to 1/4 of the shares underlying the option on the first anniversary of the grant date and as to 1/48 of the underlying shares monthly thereafter.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Vests as to 20.85% of the shares underlying the option immediately and as to 1/36 of the underlying shares monthly thereafter.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(5) | Options allow for early exercise.
|--- | ---------------------------------



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##### Table of Contents

Options Exercised and Stock Vested

The following table presents certain information concerning the exercise of options and vesting of stock awards by each of the named
executive officers during the fiscal year ended December 31, 2009, including the value of gains on exercise and the value of the stock awards.



|                     |  |                                    |        |  |                               |  |         |                                   |  |  |                          |  |  |  |   | 
|-------------------- |  | ---------------------------------- | ------ |  | ----------------------------- |  | ------- | --------------------------------- |  |  | ------------------------ |  |  |  | - | 
|                     |  | Option Awards                      |        |  | Stock Awards                  | 
|Name                 |  | Number ofSharesAcquired onExercise |        |  | Value Realizedon Exercise (1) |  |         | Number ofSharesAcquired onVesting |  |  | Value Realizedon Vesting | 
|Anthony A. DiTonno   |  |                                    |       |  |                               |  |        |                                   |  |  |                         |  |  |  |  | 
|Stephen F. Ghiglieri |  |                                    |       |  |                               |  |        |                                   |  |  |                         |  |  |  |  | 
|Jeffrey Tobias, M.D. |  |                                    | 22,000 |  |                               |  | 152,466 |                                   |  |  |                         |  |  |  |  | 
|Michael E. Markels   |  |                                    |       |  |                               |  |        |                                   |  |  |                         |  |  |  |  | 
|Susan P. Rinne       |  |                                    |       |  |                               |  |        |                                   |  |  |                         |  |  |  |  | 



|(1) | Value realized is based on the fair market value of the Companys common stock on the date of exercise (or the actual sales price if the shares were sold by the
optionee simultaneously with the exercise) minus the exercise price, without taking into account any taxes that may be payable in connection with the transaction.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Potential Payments Upon Termination or Change of Control

The following
summaries set forth potential payments payable to the Companys named executive officers upon termination of employment or a change in control of the Company under their current executive employment agreements and the Companys other
compensation programs. These agreements were amended and restated in 2009 to comply with U.S. tax laws, including regulations promulgated under Section 409A of the Internal Revenue Code of 1986, as amended, by updating certain terms and
conditions related to the timing of severance payments.

For the purpose of the executive employment agreements,
cause means an officer:



| |  |  | fails to perform his or her duties (other than due to his or her incapacity as a result of physical or mental illness for a period not to exceed 90
days);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | engages in conduct which is materially injurious to the Company, its business or reputation, or which constitutes gross misconduct;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | materially breaches the terms of any agreement between him or her and the Company;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | materially breaches or takes any action in material contravention of the Companys policies adopted by the Board of Directors or any committee
thereof;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | is convicted of, or admits or pleads no contest with respect to a felony or commits an act of fraud against the Company; or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | misappropriates material property belonging to the Company or an act of violence against an officer, director, employee or consultant of the Company.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

For the purpose of the executive employment agreements, good reason means:



| |  |  | a material reduction in his or her salary or benefits other than as a result of a reduction in compensation affecting the Companys or its
successor entitys employees generally;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a material diminution of his or her duties or responsibilities relative to his or her duties and responsibilities in effect immediately prior to a
change in control;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | relocation of his or her place of employment to a location more than 35 miles from the Companys office location at the time of a change in
control; or
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | failure of a successor entity in any change in control to assume and perform under his or her executive employment agreement.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------

For the purpose of the executive employment agreements, disability means an officers
inability to perform his or her duties as the result of his or her incapacity due to physical or mental illness, and such inability, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the
Company or its insurers and reasonably acceptable to the officer or the officers legal representative.

2006
Acquisition Bonus Plan, as amended in December 2008

Each of Messrs. DiTonno, Ghiglieri, and Markels, Dr. Tobias
and Ms. Rinne is eligible to receive a cash amount in connection with a change in control of the Company pursuant to the Companys 2006 Acquisition Bonus Plan, as amended in December 2008. Such bonus is determined by taking one percent of
the net proceeds of the change of control and multiplying such amount by a set percentage for each such named executive officer. In addition, the plan provides for a potential payment if there is a difference between cash available to common
stockholders and preferred stockholders. This plan was amended in 2008 to comply with U.S. tax laws, including regulations promulgated under Section 409A of the Internal Revenue Code of 1986, as amended, by updating certain terms and conditions
related to the timing of severance payments.

Anthony A. DiTonno

Mr. DiTonnos employment is at-will. Either the Company or Mr. DiTonno may terminate the executive employment agreement at
any time. Upon a change in control of the Company, Mr. DiTonno will receive acceleration of vesting of each of Mr. DiTonnos restricted stock grants and outstanding options to purchase Common Stock by a number of months equal to the
number of months of vesting remaining for such option as of the change in control, minus 18 months; provided, that if such stock options or restricted stock grants have fewer than 18 months of vesting remaining, then such options or restricted stock
grants will not be accelerated upon a change in control. Mr. DiTonno may be eligible to receive certain severance payments and additional acceleration of vesting of stock options and restricted stock grants held by Mr. DiTonno if
Mr. DiTonno terminates his employment for good reason or the Company terminates Mr. DiTonno without cause within the 18-month period following a change in control.

Termination by the Company or termination by Mr. DiTonno prior to a change in control. If Mr. DiTonno is terminated for any reason, or if Mr. DiTonno terminates his employment for
any reason, in each case prior to a change in control of the Company, Mr. DiTonno will not receive any severance.

Termination by the Company (other than for cause) or termination by Mr. DiTonno for good reason following a change in
control. If Mr. DiTonno is terminated for any reason other than for cause, or if Mr. DiTonno terminates his employment for good reason, in each case within the 18-month period following a change in control of the Company,
Mr. DiTonno will be entitled to receive 12 months of severance pay (less applicable withholding taxes) payable over 12 months at a rate equal to his base salary and a lump-sum payment equal to 100% of Mr. DiTonnos target annual bonus
as of the date of such termination. In addition, all restrictions, limitations and conditions applicable to outstanding stock options and restricted stock grants will lapse, performance goals will be deemed to be fully achieved and the awards will
become fully vested (and in the case of options, exercisable) upon termination of Mr. DiTonnos employment by the Company without cause or by Mr. DiTonno for good reason during the 18-month period following the change in control.
Following such terminations, Mr. DiTonno will also receive coverage under the Companys benefit plans for a period equal to the shorter of 12 months or such time as Mr. DiTonno secures employment with benefits generally similar to
those provided in the Companys benefit plans.



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Termination by the Company for cause or by Mr. DiTonno other than for good reason
following a change in control. Upon termination for any other reason, Mr. DiTonno is not entitled to any payment or benefit other than severance and any other benefits only as are then established under the Companys written severance
and benefit plans.

Termination for death or disability. If the Company terminates Mr. DiTonnos employment
as a result of Mr. DiTonnos disability or if Mr. DiTonnos employment terminates upon Mr. DiTonnos death, Mr. DiTonno is not entitled to any payment or benefit other than severance amounts paid prior to the date
of such termination and severance and any other benefits only as are then established under the Companys written severance and benefit plans.

Assuming Mr. DiTonnos employment was terminated under each of these circumstances on December 31, 2009, such payments and benefits have an estimated value of:



|                                                               |  |               |         |  |       |   |         |                                      |  |   |         | 
|-------------------------------------------------------------- |  | ------------- | ------- |  | ----- | - | ------- | ------------------------------------ |  | - | ------- | 
|                                                               |  | CashSeverance |         |  | Bonus |   |         | Value of AcceleratedEquity Awards(2) | 
|Prior to a change in control                                   |  |               |        |  |       |   |        |                                      |  |   |        | 
|Upon a change in control                                       |  |               |        |  |       | $ | 650,000 | (1)                                  |  | $ | 65,396  | 
|Without cause or for good reason following a change in control |  | $             | 425,081 |  |       | $ | 212,540 |                                      |  | $ | 464,558 | 
|Death                                                          |  |               |        |  |       |   |        |                                      |  |   |        | 
|Disability                                                     |  |               |        |  |       |   |        |                                      |  |   |        | 
|Other                                                          |  |               |        |  |       |   |        |                                      |  |   |        | 



|(1) | Represents payments to be received pursuant to the 2006 Acquisition Bonus Plan, as amended in December 2008 in connection with a change of control that would have
resulted in net proceeds to the Companys stockholders of at least $250.0 million.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The aggregate dollar amount realized upon the acceleration of vesting of an equity award represents the aggregate market price of the shares of Common Stock underlying
the equity award on the acceleration date (assumed to be the closing price on December 31, 2009) multiplied by the shares vesting on the acceleration date.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Stephen F. Ghiglieri

Mr. Ghiglieris employment is
at-will. Either the Company or Mr. Ghiglieri may terminate the executive employment agreement at any time. Upon a change in control of the Company, Mr. Ghiglieri will receive acceleration of vesting of each of Mr. Ghiglieris
restricted stock grants and outstanding options to purchase the Companys Common Stock by a number of months equal to the number of months of vesting remaining for such option as of the change in control, minus 18 months; provided, that if such
stock options or restricted stock grants have fewer than 18 months of vesting remaining, then such options or restricted stock grants will not be accelerated upon a change in control. Mr. Ghiglieri may be eligible to receive certain severance
payments and additional acceleration of vesting of stock options and restricted stock grants held by Mr. Ghiglieri if Mr. Ghiglieri terminates his employment for good reason or the Company terminates Mr. Ghiglieri without cause within
the 18-month period following a change in control.

Termination by the Company or termination by Mr. Ghiglieri prior
to a change in control. If Mr. Ghiglieri is terminated for any reason, or if Mr. Ghiglieri terminates his employment for any reason, in each case prior to a change in control of the Company, Mr. Ghiglieri will not receive any
severance.

Termination by the Company (other than for cause) or termination by Mr. Ghiglieri for good reason
following a change in control. If Mr. Ghiglieri is terminated for any reason other than cause, or if Mr. Ghiglieri terminates his employment for good reason, in each case within the 18-month period following a change in control of the
Company, Mr. Ghiglieri will be entitled to receive nine months of severance pay (less applicable withholding taxes) payable over nine months at a rate equal to his base salary and a lump-sum payment equal to 100% of Mr. Ghiglieris
target annual bonus as of the date of such termination. In addition, all restrictions, limitations and conditions applicable to outstanding stock options and restricted stock grants will lapse, performance goals will be deemed to be fully achieved
and the awards will become fully vested (and in the case of options, exercisable) upon termination of Mr. Ghiglieris employment by the Company without cause or by Mr. Ghiglieri for good reason during the 18-month period following the
change in control. Following such terminations, Mr. Ghiglieri will also receive coverage under the Companys benefit plans for a period equal to the shorter of 12 months or such time as Mr. Ghiglieri secures employment with benefits
generally similar to those provided in the Companys benefit plans.



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Termination by the Company for cause or by Mr. Ghiglieri other than for good reason
following a change in control. Upon termination for any other reason, Mr. Ghiglieri is not entitled to any payment or benefit other than severance and any other benefits only as are then established under the Companys written
severance and benefit plans.

Termination for death or disability. If the Company terminates Mr. Ghiglieris
employment as a result of Mr. Ghiglieris disability or if Mr. Ghiglieris employment terminates upon Mr. Ghiglieris death, Mr. Ghiglieri is not entitled to any payment or benefit other than severance amounts paid
prior to the date of such termination and severance and any other benefits only as are then established under the Companys written severance and benefit plans.

Assuming Mr. Ghiglieris employment was terminated under each of these circumstances on December 31, 2009, such payments and benefits have an estimated value of:



|                                                               |  |               |         |  |       |   |         |                                      |  |   |         | 
|-------------------------------------------------------------- |  | ------------- | ------- |  | ----- | - | ------- | ------------------------------------ |  | - | ------- | 
|                                                               |  | CashSeverance |         |  | Bonus |   |         | Value of AcceleratedEquity Awards(2) | 
|Prior to a change in control                                   |  |               |        |  |       |   |        |                                      |  |   |        | 
|Upon a change in control                                       |  |               |        |  |       | $ | 600,000 | (1)                                  |  | $ | 54,485  | 
|Without cause or for good reason following a change in control |  | $             | 255,053 |  |       | $ | 119,025 |                                      |  | $ | 294,437 | 
|Death                                                          |  |               |        |  |       |   |        |                                      |  |   |        | 
|Disability                                                     |  |               |        |  |       |   |        |                                      |  |   |        | 
|Other                                                          |  |               |        |  |       |   |        |                                      |  |   |        | 



|(1) | Represents payments to be received pursuant to the 2006 Acquisition Bonus Plan, as amended in December 2008 in connection with a change of control that would have
resulted in net proceeds to the Companys stockholders of at least $250.0 million.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The aggregate dollar amount realized upon the acceleration of vesting of an equity award represents the aggregate market price of the shares of Common Stock underlying
the equity award on the acceleration date (assumed to be the closing price on December 31, 2009) multiplied by the shares vesting on the acceleration date.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Jeffrey Tobias, M.D.

Dr. Tobias employment is at-will.
Either the Company or Dr. Tobias may terminate the executive employment agreement at any time. Upon a change in control of the Company, Dr. Tobias will receive acceleration of vesting of each of Dr. Tobias restricted stock
grants and outstanding options to purchase Common Stock by a number of months equal to the number of months of vesting remaining for such option as of the change in control, minus 18 months; provided, that if such stock options or restricted stock
grants have fewer than 18 months of vesting remaining, then such options or restricted stock grants will not be accelerated upon a change in control. Dr. Tobias may be eligible to receive certain severance payments and additional acceleration
of vesting of stock options and restricted stock grants held by Dr. Tobias if Dr. Tobias terminates his employment for good reason or the Company terminates Dr. Tobias without cause within the 18-month period following a change in
control.

Termination by the Company or termination by Dr. Tobias prior to a change in control. If Dr. Tobias
is terminated for any reason, or if Dr. Tobias terminates his employment for any reason, in each case prior to a change in control of the Company, Dr. Tobias will receive no severance.

Termination by the Company (other than for cause) or termination by Dr. Tobias for good reason following a change in control.
If Dr. Tobias is terminated for any reason other than cause, or if Dr. Tobias terminates his employment for good reason, in each case within the 18-month period following a change in control of the Company, Dr. Tobias will be entitled
to receive nine months of severance pay (less applicable withholding taxes) payable over nine months at a rate equal to his base salary and a lump-sum payment equal to 100% of Dr. Tobias target annual bonus as of the date of such
termination. In addition, all restrictions, limitations and conditions applicable to outstanding stock options and restricted stock grants will lapse, performance goals will be deemed to be fully achieved and the awards will become fully vested (and
in the case of options, exercisable) upon termination of Dr. Tobias employment by the Company without cause or by Dr. Tobias for good reason during the 18-month period following the change in control. Following such terminations,
Dr. Tobias will also receive coverage under the Companys benefit plans for a period equal to the shorter of 12 months or such time as Dr. Tobias secures employment with benefits generally similar to those provided in the
Companys benefit plans.



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Termination by the Company for cause or by Dr. Tobias other than for good reason
following a change in control. Upon termination for any other reason, Dr. Tobias is not entitled to any payment or benefit other than severance and any other benefits only as are then established under the Companys written severance
and benefit plans.

Termination for death or disability. If the Company terminates Dr. Tobias employment as
a result of Dr. Tobias disability or if Dr. Tobias employment terminates upon Dr. Tobias death, Dr. Tobias is not entitled to any payment or benefit other than severance amounts paid prior to the date of such
termination and severance and any other benefits only as are then established under the Companys written severance and benefit plans.

Assuming Dr. Tobias employment was terminated under each of these circumstances on December 31, 2009, such payments and benefits have an estimated value of:



|                                                               |  |               |         |  |       |   |         |                                      |  |   |         | 
|-------------------------------------------------------------- |  | ------------- | ------- |  | ----- | - | ------- | ------------------------------------ |  | - | ------- | 
|                                                               |  | CashSeverance |         |  | Bonus |   |         | Value of AcceleratedEquity Awards(2) | 
|Prior to a change in control                                   |  |               |        |  |       |   |        |                                      |  |   |        | 
|Upon a change in control                                       |  |               |        |  |       | $ | 500,000 | (1)                                  |  | $ | 28,327  | 
|Without cause or for good reason following a change in control |  | $             | 269,997 |  |       | $ | 126,000 |                                      |  | $ | 278,701 | 
|Death                                                          |  |               |        |  |       |   |        |                                      |  |   |        | 
|Disability                                                     |  |               |        |  |       |   |        |                                      |  |   |        | 
|Other                                                          |  |               |        |  |       |   |        |                                      |  |   |        | 



|(1) | Represents payments to be received pursuant to the 2006 Acquisition Bonus Plan, as amended in December 2008 in connection with a change of control that would have
resulted in net proceeds to the Companys stockholders of at least $250.0 million.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The aggregate dollar amount realized upon the acceleration of vesting of an equity award represents the aggregate market price of the shares of Common Stock underlying
the equity award on the acceleration date (assumed to be the closing price on December 31, 2009) multiplied by the shares vesting on the acceleration date.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Michael E. Markels

Mr. Markels employment is at-will.
Either the Company or Mr. Markels may terminate the executive employment agreement at any time. Upon a change in control of the Company, Mr. Markels will receive acceleration of vesting of each of Mr. Markels restricted stock
grants and outstanding options to purchase Common Stock by a number of months equal to the number of months of vesting remaining for such option as of the change in control, minus 18 months; provided, that if such stock options or restricted stock
grants have fewer than 18 months of vesting remaining, then such options or restricted stock grants will not be accelerated upon a change in control. Mr. Markels may be eligible to receive certain severance payments and additional acceleration
of vesting of stock options and restricted stock grants held by Mr. Markels if Mr. Markels terminates his employment for good reason or the Company terminates Mr. Markels without cause within the 18-month period following a change in
control.

Termination by the Company or termination by Mr. Markels prior to a change in control. If
Mr. Markels is terminated for any reason, or if Mr. Markels terminates his employment for any reason, in each case prior to a change in control of the Company, Mr. Markels will receive no severance.

Termination by the Company (other than for cause) or termination by Mr. Markels for good reason following a change in
control. If Mr. Markels is terminated for any reason other than cause, or if Mr. Markels terminates his employment for good reason, in each case within the 18-month period following a change in control of the Company, Mr. Markels
will be entitled to receive nine months of severance pay (less applicable withholding taxes) payable over nine months at a rate equal to his base salary and a lump-sum payment equal to 100% of Mr. Markels target annual bonus as of the
date of such termination. In addition, all restrictions, limitations and conditions applicable to outstanding stock options and restricted stock grants will lapse, performance goals will be deemed to be fully achieved and the awards will become
fully vested (and in the case of options, exercisable) upon termination of Mr. Markels employment by the Company without cause or by Mr. Markels for good reason during the 18-month period following



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the change in control. Following such terminations, Mr. Markels will also receive coverage under the Companys benefit plans for a period equal to the shorter of 12 months or such time
as Mr. Markels secures employment with benefits generally similar to those provided in the Companys benefit plans.

Termination by the Company for cause or by Mr. Markels other than for good reason following a change in control. Upon
termination for any other reason, Mr. Markels is not entitled to any payment or benefit other than severance and any other benefits only as are then established under the Companys written severance and benefit plans.

Termination for death or disability. If the Company terminates Mr. Markels employment as a result of
Mr. Markels disability or if Mr. Markels employment terminates upon Mr. Markels death, Mr. Markels is not entitled to any payment or benefit other than severance amounts paid prior to the date of such
termination and severance and any other benefits only as are then established under the Companys written severance and benefit plans.

Assuming Mr. Markels employment was terminated under each of these circumstances on December 31, 2009, such payments and benefits have an estimated value of:



|                                                               |  |               |         |  |       |   |         |                                      |  |   |         | 
|-------------------------------------------------------------- |  | ------------- | ------- |  | ----- | - | ------- | ------------------------------------ |  | - | ------- | 
|                                                               |  | CashSeverance |         |  | Bonus |   |         | Value of AcceleratedEquity Awards(2) | 
|Prior to a change in control                                   |  |               |        |  |       |   |        |                                      |  |   |        | 
|Upon a change in control                                       |  |               |        |  |       | $ | 125,000 | (1)                                  |  | $ | 30,439  | 
|Without cause or for good reason following a change in control |  | $             | 213,720 |  |       | $ | 85,488  |                                      |  | $ | 203,798 | 
|Death                                                          |  |               |        |  |       |   |        |                                      |  |   |        | 
|Disability                                                     |  |               |        |  |       |   |        |                                      |  |   |        | 
|Other                                                          |  |               |        |  |       |   |        |                                      |  |   |        | 



|(1) | Represents payments to be received pursuant to the 2006 Acquisition Bonus Plan, as amended in December 2008 in connection with a change of control that would have
resulted in net proceeds to the Companys stockholders of at least $250.0 million.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The aggregate dollar amount realized upon the acceleration of vesting of an equity award represents the aggregate market price of the shares of Common Stock underlying
the equity award on the acceleration date (assumed to be the closing price on December 31, 2009) multiplied by the shares vesting on the acceleration date.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Susan P. Rinne

Ms. Rinnes employment is at-will. Either
the Company or Ms. Rinne may terminate the executive employment agreement at any time. Ms. Rinne may be eligible to receive certain severance payments and acceleration of vesting of stock options and restricted stock grants held by
Ms. Rinne if Ms. Rinne terminates her employment for good reason or the Company terminates Ms. Rinne without cause within the 18-month period following a change in control.

Termination by the Company or termination by Ms. Rinne prior to a change in control. If Ms. Rinne is terminated for any
reason, or if Ms. Rinne terminates her employment for any reason, in each case prior to a change in control of the Company, Ms. Rinne will receive no severance.

Termination by the Company (other than for cause) or termination by Ms. Rinne for good reason following a change in control. If Ms. Rinne is terminated for any reason other than cause, or
if Ms. Rinne terminates her employment for good reason, in each case within the 18-month period following a change in control of the Company, Ms. Rinne will be entitled to receive six months of severance pay (less applicable withholding
taxes) payable over six months at a rate equal to her base salary and a lump-sum payment equal to 50% of Ms. Rinnes target annual bonus as of the date of such termination. In addition, 50% of Ms. Rinnes then outstanding options
to purchase shares of the Companys Common Stock shall immediately vest and become exercisable and all of the shares of the Companys Common Stock then held by Ms. Rinne subject to a Company right of repurchase shall immediately vest
and such right of repurchase shall lapse upon termination of Ms. Rinnes employment by the Company without cause or by Ms. Rinne for good reason



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during the 18-month period following the change in control. Following such terminations, Ms. Rinne will also receive coverage under the Companys benefit plans for a period equal to the
shorter of 9 months or such time as Ms. Rinne secures employment with benefits generally similar to those provided in the Companys benefit plans.

Termination by the Company for cause or by Ms. Rinne other than for good reason following a change in control. Upon termination for any other reason, Ms. Rinne is not entitled to any
payment or benefit other than severance and any other benefits only as are then established under the Companys written severance and benefit plans.

Termination for death or disability. If the Company terminates Ms. Rinnes employment as a result of Ms. Rinnes disability or if Ms. Rinnes employment terminates
upon Ms. Rinnes death, Ms. Rinne is not entitled to any payment or benefit other than severance amounts paid prior to the date of such termination and severance and any other benefits only as are then established under the
Companys written severance and benefit plans.

Assuming Ms. Rinnes employment was terminated under each of
these circumstances on December 31, 2009, such payments and benefits have an estimated value of:



|                                                               |  |               |         |  |       |   |         |                                      |  |   |         | 
|-------------------------------------------------------------- |  | ------------- | ------- |  | ----- | - | ------- | ------------------------------------ |  | - | ------- | 
|                                                               |  | CashSeverance |         |  | Bonus |   |         | Value of AcceleratedEquity Awards(2) | 
|Prior to a change in control                                   |  |               |        |  |       |   |        |                                      |  |   |        | 
|Upon a change in control                                       |  |               |        |  |       | $ | 125,000 | (1)                                  |  | $ | 16,866  | 
|Without cause or for good reason following a change in control |  | $             | 139,125 |  |       | $ | 27,825  |                                      |  | $ | 257,815 | 
|Death                                                          |  |               |        |  |       |   |        |                                      |  |   |        | 
|Disability                                                     |  |               |        |  |       |   |        |                                      |  |   |        | 
|Other                                                          |  |               |        |  |       |   |        |                                      |  |   |        | 



|(1) | Represents payments to be received pursuant to the 2006 Acquisition Bonus Plan, as amended in December 2008 in connection with a change of control that would have
resulted in net proceeds to the Companys stockholders of at least $250.0 million.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The aggregate dollar amount realized upon the acceleration of vesting of an equity award represents the aggregate market price of the shares of Common Stock underlying
the equity award on the acceleration date (assumed to be the closing price on December 31, 2009) multiplied by the shares vesting on the acceleration date.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Companys officers and directors, and persons who own more than ten percent of a
registered class of the Companys equity securities, to file reports of ownership and changes in ownership with the SEC. Such officers, directors and ten-percent stockholders are also required by SEC rules to furnish the Company with copies of
all forms that they file pursuant to Section 16(a). Based solely on the Companys review of the copies of such forms received by it, or written representations from certain reporting persons, the Company believes that during fiscal 2009,
the Companys executive officers, directors and ten-percent stockholders complied with all applicable filing requirements.



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PART IV



|Item 15. | Exhibits and Financial Statement Schedules
|-------- | ------------------------------------------

(a) The following documents are filed as part of this Form 10-K/A:



|              |  |                                                                                                                                                                 
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Title                                                                                                                                                   
|              | 
|31.1          |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                         
|              | 
|31.2          |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                         
|              | 
|32.1          |  | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
1350).



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.



NEUROGESX, INC.By:

/S/    ANTHONY A, DITONNOAnthony A, DiTonnoPresident, Chief Executive Officer and Director(Principal Executive Officer)


Dated: January 21, 2011

POWER OF
ATTORNEY



|     |  |                                                  |  |                                                                                                                              |  |                 
|---- |  | ------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------- |  | ----------------
|     |  | Signature                                        |  | Title                                                                                                                        |  | Date            
|     |  |                                                  | 
|     |  | /s/    ANTHONY A.
DITONNO Anthony A. DiTonno     |  | President, Chief Executive Officer and Director (Principal Executive Officer)                                                |  | January 21, 2011
|     |  |                                                  | 
|     |  | /s/    STEPHEN F.
GHIGLIERI Stephen F. Ghiglieri |  | Executive Vice President, Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting
Executive) |  | January 21, 2011
|     |  |                                                  | 
|     |  | * Jean-Jacques Bienaimé                          |  | Chairman of the Board of Directors                                                                                           |  | January 21, 2011
|     |  |                                                  | 
|     |  | * Neil M. Kurtz                                  |  | Director                                                                                                                     |  | January 21, 2011
|     |  |                                                  | 
|     |  | * Robert T. Nelsen                               |  | Director                                                                                                                     |  | January 21, 2011
|     |  |                                                  | 
|     |  | * Brad Goodwin                                   |  | Director                                                                                                                     |  | January 21, 2011
|     |  |                                                  | 
|     |  | * John Orwin                                     |  | Director                                                                                                                     |  | January 21, 2011
|     |  |                                                  | 
|     |  | Steven
Nelson                                    |  | Director                                                                                                                     |  |                 
|     |  |                                                  | 
|*By: |  | /s/    ANTHONY A.
DITONNO Anthony A. DiTonno     |  | Attorney-in-Fact                                                                                                             |  | January 21, 2011



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