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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q

(Mark One)



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

For the quarterly period ended March 31, 2009

or



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

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, California     |  | 94404                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             

Registrants telephone number, including area code: (650) 358-3300

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 Web site, 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



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

Number of shares of common stock, $0.001 par value, outstanding as of April 30, 2009: 17,569,291









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NEUROGESX, INC.

(A DEVELOPMENT STAGE COMPANY)

TABLE OF CONTENTS FOR FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2009



|                              |  |                                                                                                                                                                             |  |     
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                                                                             |  | Page
|PART I. FINANCIAL INFORMATION |  | 1                                                                                                                                                                          
|Item 1.                       |  | Financial Statements (unaudited)                                                                                                                                            |  | 1   
|                              |  | Condensed Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008                                                                                            |  | 1   
|                              |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008, and the period from May
 28, 1998 (date of inception) to March 31, 2009 |  | 2   
|                              |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008, and the period from May
 28, 1998 (date of inception) to March 31, 2009 |  | 3   
|                              |  | Notes to Condensed Consolidated Financial Statements                                                                                                                        |  | 4   
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                       |  | 11  
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                  |  | 19  
|Item 4T.                      |  | Controls and Procedures                                                                                                                                                     |  | 19  
|                              | 
|PART II. OTHER INFORMATION    |  | 20                                                                                                                                                                         
|Item 1.                       |  | Legal Proceedings                                                                                                                                                           |  | 20  
|Item 1A.                      |  | Risk Factors                                                                                                                                                                |  | 20  
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                 |  | 40  
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                                                                             |  | 40  
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                                                                         |  | 40  
|Item 5.                       |  | Other Information                                                                                                                                                           |  | 40  
|Item 6.                       |  | Exhibits                                                                                                                                                                    |  | 41  
|                              | 
|SIGNATURES                    |  | 42                                                                                                                                                                         
|                              | 
|EXHIBIT INDEX                 |  | 43                                                                                                                                                                         



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS (Unaudited)
|------- | --------------------------------

NeurogesX, Inc.

(A Development Stage Company)

Condensed Consolidated Balance Sheets

(in thousands)



|                                                 |  |               |          |   |                  |   |          |  
|------------------------------------------------ |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                 |  | March 31,2009 |          |   | December 31,2008 |  
|                                                 |  | (unaudited)   |          |   | (Note 1)         |  
|Assets                                           |  |               |          |   |                  |   |          |  
|Current assets:                                  |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                        |  | $             | 6,561    |   |                  | $ | 10,435   |  
|Short-term investments                           |  |               | 12,286   |   |                  |   | 14,071   |  
|Prepaid expenses and other current assets        |  |               | 362      |   |                  |   | 412      |  
|Restricted cash                                  |  |               | 40       |   |                  |   | 40       |  
|                                                 |  |               |          |   |                  |   |          |  
|Total current assets                             |  |               | 19,249   |   |                  |   | 24,958   |  
|Property and equipment, net                      |  |               | 420      |   |                  |   | 468      |  
|Restricted cash                                  |  |               | 160      |   |                  |   | 160      |  
|Other assets                                     |  |               |         |   |                  |   | 4        |  
|                                                 |  |               |          |   |                  |   |          |  
|Total assets                                     |  | $             | 19,829   |   |                  | $ | 25,590   |  
|                                                 |  |               |          |   |                  |   |          |  
|Liabilities and Stockholders Equity             |  |               |          |   |                  |   |          |  
|Current liabilities:                             |  |               |          |   |                  |   |          |  
|Accounts payable                                 |  | $             | 478      |   |                  | $ | 370      |  
|Accrued compensation                             |  |               | 601      |   |                  |   | 1,039    |  
|Accrued research and development                 |  |               | 623      |   |                  |   | 1,067    |  
|Other accrued expenses                           |  |               | 621      |   |                  |   | 540      |  
|Notes payable  current portion                  |  |               | 1,982    |   |                  |   | 2,833    |  
|                                                 |  |               |          |   |                  |   |          |  
|Total current liabilities                        |  |               | 4,305    |   |                  |   | 5,849    |  
|Non-current liabilities:                         |  |               |          |   |                  |   |          |  
|Notes payable  non-current portion              |  |               |         |   |                  |   | 191      |  
|Deferred rent                                    |  |               | 367      |   |                  |   | 276      |  
|                                                 |  |               |          |   |                  |   |          |  
|Total non-current liabilities                    |  |               | 367      |   |                  |   | 467      |  
|Commitments and contingencies                    |  |               |          |   |                  |   |          |  
|Stockholders equity:                            |  |               |          |   |                  |   |          |  
|Common stock                                     |  |               | 18       |   |                  |   | 18       |  
|Additional paid-in capital                       |  |               | 209,877  |   |                  |   | 209,370  |  
|Deferred stock-based compensation                |  |               | (1       | ) |                  |   | (2       | )
|Accumulated other comprehensive income           |  |               | 9        |   |                  |   | 32       |  
|Deficit accumulated during the development stage |  |               | (194,746 | ) |                  |   | (190,144 | )
|                                                 |  |               |          |   |                  |   |          |  
|Total stockholders equity                       |  |               | 15,157   |   |                  |   | 19,274   |  
|                                                 |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders equity       |  | $             | 19,829   |   |                  | $ | 25,590   |  
|                                                 |  |               |          |   |                  |   |          |  

See accompanying notes.



1



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NeurogesX, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)



|                                                                                                |  |                              |            |   |                                                |   |            |      |  |   |          |  
|----------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---------------------------------------------- | - | ---------- | ---- |  | - | -------- | -
|                                                                                                |  | Three Months Ended March 31, |            |   | Period fromMay 28, 1998(inception) toMarch 31, |  
|                                                                                                |  | 2009                         |            |   | 2008                                           |   |            | 2009 | 
|Operating expenses:                                                                             |  |                              |            |   |                                                |   |            |      |  |   |          |  
|Research and development(1)                                                                     |  | $                            | 2,326      |   |                                                | $ | 5,781      |      |  | $ | 113,818  |  
|General and administrative(2)                                                                   |  |                              | 2,189      |   |                                                |   | 2,487      |      |  |   | 41,244   |  
|                                                                                                |  |                              |            |   |                                                |   |            |      |  |   |          |  
|Total operating expenses                                                                        |  |                              | 4,515      |   |                                                |   | 8,268      |      |  |   | 155,062  |  
|                                                                                                |  |                              |            |   |                                                |   |            |      |  |   |          |  
|Loss from operations                                                                            |  |                              | (4,515     | ) |                                                |   | (8,268     | )    |  |   | (155,062 | )
|Interest income                                                                                 |  |                              | 33         |   |                                                |   | 504        |      |  |   | 5,005    |  
|Interest expense                                                                                |  |                              | (120       | ) |                                                |   | (243       | )    |  |   | (2,838   | )
|Other income (expense), net                                                                     |  |                              |           |   |                                                |   | 17         |      |  |   | (2,947   | )
|                                                                                                |  |                              |            |   |                                                |   |            |      |  |   |          |  
|Net loss before cumulative effect of change in accounting principle                             |  |                              | (4,602     | ) |                                                |   | (7,990     | )    |  |   | (155,842 | )
|Cumulative effect of change in accounting principle                                             |  |                              |           |   |                                                |   |           |      |  |   | (32      | )
|                                                                                                |  |                              |            |   |                                                |   |            |      |  |   |          |  
|Net loss                                                                                        |  |                              | (4,602     | ) |                                                |   | (7,990     | )    |  |   | (155,874 | )
|Accretion of redeemable convertible preferred stock                                             |  |                              |           |   |                                                |   |           |      |  |   | (38,872  | )
|                                                                                                |  |                              |            |   |                                                |   |            |      |  |   |          |  
|Net loss attributable to common stockholders                                                    |  | $                            | (4,602     | ) |                                                | $ | (7,990     | )    |  | $ | (194,746 | )
|                                                                                                |  |                              |            |   |                                                |   |            |      |  |   |          |  
|Basic and diluted net loss per share attributable to common stockholders                        |  | $                            | (0.26      | ) |                                                | $ | (0.46      | )    |  |   |          |  
|                                                                                                |  |                              |            |   |                                                |   |            |      |  |   |          |  
|Shares used to compute basic and diluted net loss per share attributable to common stockholders |  |                              | 17,568,600 |   |                                                |   | 17,468,395 |      |  |   |          |  
|                                                                                                |  |                              |            |   |                                                |   |            |      |  |   |          |  
|                                                                                                |  |                              |           
|Non-cash stock-based compensation expense included in operating expenses:                       |  |                              |            |   |                                                |   |            |      |  |   |          |  
|(1)    Research and development                                                                 |  | $                            | 259        |   |                                                | $ | 198        |      |  |   |          |  
|(2)    General and administrative                                                               |  |                              | 248        |   |                                                |   | 201        |      |  |   |          |  
|                                                                                                |  |                              |            |   |                                                |   |            |      |  |   |          |  
|                                                                                                |  | $                            | 507        |   |                                                | $ | 399        |      |  |   |          |  
|                                                                                                |  |                              |            |   |                                                |   |            |      |  |   |          |  

See accompanying notes.



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NeurogesX, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



|                                                                                        |  |                             |        |   |                                                |   |         |      |  |   |          |  
|--------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---------------------------------------------- | - | ------- | ---- |  | - | -------- | -
|                                                                                        |  | Three Months EndedMarch 31, |        |   | Period fromMay 28, 1998(inception) toMarch 31, |  
|                                                                                        |  | 2009                        |        |   | 2008                                           |   |         | 2009 | 
|Operating activities                                                                    |  |                             |        |   |                                                |   |         |      |  |   |          |  
|Net loss                                                                                |  | $                           | (4,602 | ) |                                                | $ | (7,990  | )    |  | $ | (155,874 | )
|Adjustments to reconcile net loss to net cash used in operating activities:             |  |                             |        |   |                                                |   |         |      |  |   |          |  
|Depreciation and amortization                                                           |  |                             | 49     |   |                                                |   | 39      |      |  |   | 1,595    |  
|Amortization of debt issuance costs                                                     |  |                             | 42     |   |                                                |   | 50      |      |  |   | 534      |  
|Amortization/accretion of investment premiums/(discounts), net                          |  |                             | 36     |   |                                                |   | (301    | )    |  |   | (1,051   | )
|Stock-based compensation                                                                |  |                             | 507    |   |                                                |   | 399     |      |  |   | 8,962    |  
|Loss on sales of short-term investments                                                 |  |                             |       |   |                                                |   |        |      |  |   | 8        |  
|(Gain)/loss on disposal of fixed assets                                                 |  |                             |       |   |                                                |   |        |      |  |   | 87       |  
|Revaluation of preferred stock warrant liability                                        |  |                             |       |   |                                                |   |        |      |  |   | 2,888    |  
|Changes in operating assets and liabilities:                                            |  |                             |        |   |                                                |   |         |      |  |   |          |  
|Prepaid expenses and other current assets                                               |  |                             | 50     |   |                                                |   | 253     |      |  |   | (362     | )
|Other assets                                                                            |  |                             |       |   |                                                |   |        |      |  |   | (106     | )
|Accounts payable                                                                        |  |                             | 108    |   |                                                |   | (771    | )    |  |   | 478      |  
|Accrued compensation                                                                    |  |                             | (438   | ) |                                                |   | (37     | )    |  |   | 601      |  
|Accrued research and development                                                        |  |                             | (444   | ) |                                                |   | 1,010   |      |  |   | 623      |  
|Deferred rent                                                                           |  |                             | 128    |   |                                                |   | 71      |      |  |   | 427      |  
|Other accrued expenses                                                                  |  |                             | 46     |   |                                                |   | (991    | )    |  |   | 574      |  
|                                                                                        |  |                             |        |   |                                                |   |         |      |  |   |          |  
|Net cash used in operating activities                                                   |  |                             | (4,518 | ) |                                                |   | (8,268  | )    |  |   | (140,616 | )
|                                                                                        |  |                             |        |   |                                                |   |         |      |  |   |          |  
|Investing activities                                                                    |  |                             |        |   |                                                |   |         |      |  |   |          |  
|Purchases of short-term investments                                                     |  |                             | (8,524 | ) |                                                |   | (30,385 | )    |  |   | (195,767 | )
|Proceeds from maturities of short-term investments                                      |  |                             | 10,250 |   |                                                |   | 18,278  |      |  |   | 151,604  |  
|Proceeds from sales of short-term investments                                           |  |                             |       |   |                                                |   |        |      |  |   | 32,929   |  
|Change in restricted cash                                                               |  |                             |       |   |                                                |   |        |      |  |   | (200     | )
|Proceeds from disposal of property and equipment                                        |  |                             |       |   |                                                |   |        |      |  |   | 8        |  
|Purchases of property and equipment                                                     |  |                             | (1     | ) |                                                |   | (63     | )    |  |   | (2,110   | )
|                                                                                        |  |                             |        |   |                                                |   |         |      |  |   |          |  
|Net cash provided by/(used in) investing activities                                     |  |                             | 1,725  |   |                                                |   | (12,170 | )    |  |   | (13,536  | )
|                                                                                        |  |                             |        |   |                                                |   |         |      |  |   |          |  
|Financing activities                                                                    |  |                             |        |   |                                                |   |         |      |  |   |          |  
|Proceeds from notes payable                                                             |  |                             |       |   |                                                |   |        |      |  |   | 11,092   |  
|Repayment of notes payable                                                              |  |                             | (1,081 | ) |                                                |   | (959    | )    |  |   | (9,069   | )
|Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs |  |                             |       |   |                                                |   |        |      |  |   | 96,187   |  
|Proceeds from issuance of warrants                                                      |  |                             |       |   |                                                |   | 14      |      |  |   | 150      |  
|Proceeds from issuance of common stock                                                  |  |                             |       |   |                                                |   | 2,275   |      |  |   | 62,353   |  
|                                                                                        |  |                             |        |   |                                                |   |         |      |  |   |          |  
|Net cash provided by/(used in) financing activities                                     |  |                             | (1,081 | ) |                                                |   | 1,330   |      |  |   | 160,713  |  
|                                                                                        |  |                             |        |   |                                                |   |         |      |  |   |          |  
|Net increase/(decrease) in cash and cash equivalents                                    |  |                             | (3,874 | ) |                                                |   | (19,108 | )    |  |   | 6,561    |  
|Cash and cash equivalents, beginning of period                                          |  |                             | 10,435 |   |                                                |   | 31,478  |      |  |   |         |  
|                                                                                        |  |                             |        |   |                                                |   |         |      |  |   |          |  
|Cash and cash equivalents, end of period                                                |  | $                           | 6,561  |   |                                                | $ | 12,370  |      |  | $ | 6,561    |  
|                                                                                        |  |                             |        |   |                                                |   |         |      |  |   |          |  
|Supplemental cash flow information                                                      |  |                             |        |   |                                                |   |         |      |  |   |          |  
|Cash paid for interest                                                                  |  | $                           | 81     |   |                                                | $ | 203     |      |  | $ | 2,238    |  
|                                                                                        |  |                             |        |   |                                                |   |         |      |  |   |          |  

See accompanying notes.



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NEUROGESX, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)

Note 1. The Company

Nature of Operations

NeurogesX, Inc. (the
Company) is a biopharmaceutical company focused on developing and commercializing novel pain management therapies. The Company is assembling a portfolio of pain management product candidates based on known chemical entities to develop
innovative new therapies which the Company believes may offer substantial advantages over currently available treatment options. The Companys initial focus is on the management of chronic peripheral neuropathic pain conditions. The
Companys most advanced product candidate, Qutenza (formerly NGX-4010), a dermal patch containing a high concentration of synthetic capsaicin, is designed to manage pain associated
with peripheral neuropathic pain conditions.

The Company submitted to the U.S. Food and Drug Administration (FDA) a new drug
application (NDA) for Qutenza for the management of pain associated with postherpetic neuralgia (PHN) in October 2008, which was filed by the FDA in December 2008. The Companys NDA has a Prescription Drug User Fee Act
(PDUFA) date of August 16, 2009, at which time the Company anticipates receiving a complete response letter from the FDA. 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 FDA has recently requested that the Company conduct a study, which the Company believes would be relatively small and short term, to determine if application of Qutenza following pre-treatment with an
FDA-approved topical anesthetic would have a reasonably similar tolerability profile to application following the over the counter formulation of lidocaine used in the Companys clinical trials. The Company is currently assessing this request.
If the Company is required to conduct an additional study and submit additional data, this is likely to result in an extension of the FDAs review timeline for the Qutenza NDA.

In September 2007 the Company submitted a marketing authorization application (MAA) for Qutenza with the European Medicines Agency
(EMEA) under the centralized procedure. On March 19, 2009, the Committee for Medicinal Products for Human Use (CHMP) issued a positive opinion recommending the approval of the Companys MAA for Qutenza for the
treatment of peripheral neuropathic in non-diabetic adults either alone or in combination with other medicinal products for pain. The Company is currently awaiting the European Commissions decision on the CHMPs opinion, a process which
normally takes approximately 60 to 90 days. A European Commission decision approving the Companys MAA would constitute approval to market Qutenza in the European Union. If the European Commission approves the MAA, product pricing for
government sponsored health-care reimbursement will need to be negotiated in most countries of the European Union, and for hospital-based products, product pricing may need to be established directly with hospitals. This process can take months or
substantially longer to complete, if at all.

The Company was incorporated in California as Advanced Analgesics, Inc. on May 28, 1998
and changed its name to NeurogesX, Inc. in September 2000. In February 2007, the Company reincorporated into Delaware. The Company is located in San Mateo, California. Since its inception, the Company has devoted substantially all of its efforts to
the development of Qutenza and other potential products, establishing its offices, recruiting personnel, performing business and financial planning, and raising capital. Accordingly, the Company is considered to be in the development stage. The
Company has not generated any revenue to date and has incurred operating and net losses each year since inception in 1998.

In 2008, in
response to the generally weak economic conditions which the Company believes has resulted in a challenging environment for raising capital, the Company deferred further pre-clinical and clinical development activities for all of its product
candidates in order to focus its fiscal and human resources on the prosecution of its MAA and NDA for Qutenza and on continuing support of its strategies for obtaining adequate reimbursement for Qutenza in the United States. The Company expects to
re-initiate some or all of its development programs if additional funds become available or, if necessary, in support of its regulatory activities. The Company holds worldwide commercial rights to all of its product candidates and is actively
engaged in discussions with potential commercial partners. Further, the Company is currently seeking development partners for its acetaminophen and opioid prodrug product candidates.



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The Company had cash, cash equivalents and short-term investments totaling $18.8 million at
March 31, 2009, which the Company believes is sufficient to fund its operations through at least December 31, 2009. The Company intends to seek additional funding through strategic alliances, debt facilities or other financing vehicles
which may include the public or private sales of its equity securities.

Principles of Consolidation

The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiary, NeurogesX UK Limited, which was incorporated as
of June 1, 2004. NeurogesX UK Limited was established for the purposes of conducting clinical trials in the UK and marketing approval submission. The subsidiary has no assets other than the initial formation capital totaling one Pound Sterling.

Basis of Presentation

The
accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information on the same basis as
the annual consolidated financial statements and in accordance with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial
statements. The unaudited condensed consolidated interim financial statements include all adjustments (consisting only of normal recurring adjustments) that management believes are necessary for the fair statement of the balances and results for the
periods presented. These unaudited condensed consolidated interim financial statement results are not necessarily indicative of results to be expected for the full fiscal year or any future interim period.

The balance sheet at December 31, 2008 has been derived from the audited consolidated financial statements at that date. The unaudited condensed
consolidated interim financial statements and related disclosures have been prepared with the presumption that users of such information have read or have access to the audited consolidated financial statements for the preceding fiscal year.
Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2008 contained in the Companys 2008 Form 10-K.

Use of Estimates

The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Note 2. Summary of Significant Accounting Policies

Stock-Based
Compensation

Effective January 1, 2006 the Company adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 123R, Share-Based Payment(SFAS No. 123R). Under SFAS No. 123R, 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 the Company has elected to amortize on a straight-line basis. The Company has applied the provisions of Staff Accounting



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Bulletin No. 110, which allows for the utilization of a simplified method in determining the expected term of an option. Because non-cash stock
compensation expense is based on awards ultimately expected to vest, it has been reduced by an estimate for future forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. The Company adopted the provisions of SFAS No. 123R using the prospective transition method. Under the prospective transition method, beginning January 1, 2006, compensation cost
recognized includes:



| |  |  | compensation cost for all share-based payments granted prior to, but not yet vested as of December 31, 2005, based on the intrinsic value in accordance with
the provisions of APB No. 25, and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123R.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All awards granted, modified, or settled after the date of adoption are accounted for
using the measurement, recognition, and attribution provisions of SFAS No. 123R. The Company has elected to use the Black-Scholes option valuation model to estimate the fair value of stock options. Stock compensation expense relating to options
with acceleration of vesting dependant upon the achievement of milestones is recognized over a period which is the shorter of:



| |  |  | the Companys evaluation of the probability of achievement of each respective milestone and the related estimated date of achievement; or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the otherwise stated time-based vesting period.
| | - |  | -----------------------------------------------

The following table shows the assumptions used to compute stock-based compensation expense for stock options granted to employees for three months ended March 31, 2009 and 2008 using the Black-Scholes valuation
model. The table below also shows the assumptions used to compute stock-based compensation expense for the Companys Employee Stock Purchase Plan (ESPP) during the three months ended March 31, 2009 and 2008 using the
Black-Scholes valuation model:



|                         |  |                              |  |           
|------------------------ |  | ---------------------------- |  | ----------
|                         |  | Three Months Ended March 31,
|                         |  | 2009                         |  | 2008      
|Stock Options            |  |                              |  |           
|Expected dividend yield  |  | 0%                           |  | 0%        
|Expected volatility      |  | 70%                          |  | 70%       
|Expected life (in years) |  | 6.0                          |  | 6.0       
|Risk-free interest rate  |  | 1.8%                         |  | 3.1%      
|ESPP                     |  |                              |  |           
|Expected dividend yield  |  | 0%                           |  | 0%        
|Expected volatility      |  | 56  83%                     |  | 44  68%  
|Expected life (in years) |  | 0.5  1.0                    |  | 0.5  1.0 
|Risk-free interest rate  |  | 0.8  2.1%                   |  | 3.6  5.0%



6



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##### Table of Contents

Comprehensive Loss

The Company reports comprehensive loss and its components as part of total stockholders equity. Comprehensive loss is comprised of net loss and unrealized gains (losses) on available-for-sale investments. For
the three months ended March 31, 2009 and 2008, comprehensive loss was as follows:



|                                     |  |                              |        |   |      |   |        |  
|------------------------------------ |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                     |  | Three Months Ended March 31, |       
|                                     |  | 2009                         |        |   | 2008 |  
|Net loss                             |  | $                            | (4,602 | ) |      | $ | (7,990 | )
|Changes in unrealized gains (losses) |  |                              | (23    | ) |      |   | 202    |  
|                                     |  |                              |        |   |      |   |        |  
|Total comprehensive loss             |  | $                            | (4,625 | ) |      | $ | (7,788 | )
|                                     |  |                              |        |   |      |   |        |  

The fluctuation in accumulated other comprehensive income represents the net change in fair value
for invested assets as a result of changes in interest rates and other factors affecting fair value and as a result of sales of investments prior to their maturities. The cumulative effect of these periodic fluctuations is reflected as other
comprehensive income on the Companys balance sheet.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares
outstanding during the period less the weighted average unvested common shares subject to repurchase and without consideration of common stock equivalents. Diluted net loss per share is computed by dividing the net loss attributable to common
stockholders by the weighted-average number of common share and share equivalents outstanding for the period, less the weighted average unvested common shares subject to repurchase. For purposes of this calculation, warrants and options to purchase
common stock are considered to be common equivalent shares but have been excluded from the calculation of diluted net loss per share as their effect is anti-dilutive.



|                                                                                                                             |  |                                               |            |   |      |   |            |  
|---------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                             |  | Three Months Ended March 31,                  |           
|                                                                                                                             |  | 2009                                          |            |   | 2008 |  
|                                                                                                                             |  | (in thousands except share andper share data) |           
|Numerator:                                                                                                                   |  |                                               |            |   |      |   |            |  
|Net loss attributable to common stockholders                                                                                 |  | $                                             | (4,602     | ) |      | $ | (7,990     | )
|                                                                                                                             |  |                                               |            |   |      |   |            |  
|Denominator:                                                                                                                 |  |                                               |            |   |      |   |            |  
|Weighted-average common shares outstanding                                                                                   |  |                                               | 17,569,201 |   |      |   | 17,470,306 |  
|Less: Weighted-average unvested common shares subject to repurchase                                                          |  |                                               | (601       | ) |      |   | (1,911     | )
|                                                                                                                             |  |                                               |            |   |      |   |            |  
|Denominator for basic and diluted net loss per share attributable to common stockholders                                     |  |                                               | 17,568,600 |   |      |   | 17,468,395 |  
|                                                                                                                             |  |                                               |            |   |      |   |            |  
|Basic and diluted net loss per share attributable to common stockholders                                                     |  | $                                             | (0.26      | ) |      | $ | (0.46      | )
|                                                                                                                             |  |                                               |            |   |      |   |            |  
|                                                                                                                             | 
|                                                                                                                             |  | March 31,                                     |           
|                                                                                                                             |  | 2009                                          |            |   | 2008 |  
|Historical outstanding securities not included in diluted net loss per share attributable to common stockholder calculation: |  |                                               |            |   |      |   |            |  
|Options to purchase common stock                                                                                             |  |                                               | 1,999,937  |   |      |   | 1,431,101  |  
|Warrants outstanding                                                                                                         |  |                                               | 1,265,846  |   |      |   | 1,265,846  |  
|Common stock subject to repurchase                                                                                           |  |                                               | 417        |   |      |   | 1,533      |  
|                                                                                                                             |  |                                               |            |   |      |   |            |  
|                                                                                                                             |  |                                               | 3,266,200  |   |      |   | 2,698,480  |  
|                                                                                                                             |  |                                               |            |   |      |   |            |  



7



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##### Table of Contents

Recently Issued Accounting Standards

Adopted in 2009

In December
2007, the Emerging Issues Task Force (EITF) issued EITF Issue 07-1, Accounting for Collaborative Arrangements(EITF 07-1), 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 income statement 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 EITF 07-1 are effective for fiscal years beginning on or after December 15, 2008. The Company
adopted EITF 07-1 on January 1, 2009. The adoption of EITF 07-1 did not have a material impact on the Companys financial position or results of operations.

Financial Accounting Standards Board (FASB) Staff Position FAS 157-2, Effective Date of FASB Statement No. 157, (FSP No. 157-2) delayed the effective date of FASB Statement
No. 157, Fair Value Measurements (SFAS No. 157), for non-financial assets and non-financial liabilities except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at
least annually), until fiscal years beginning after November 15, 2008. The Company adopted FSP No. 157-2 on January 1, 2009. Since the Company does not currently have assets or liabilities that are required to be measured on a
non-recurring basis, the adoption of FSP No. 157-2 did not have a material impact on the Companys financial position or results of operations.

Note 3. Cash and Cash Equivalents and Short-Term Investments

The following are summaries of cash, cash equivalents and
short-term investments (in thousands):



|                            |  |      |        |                      |   |                       |  |                     |   |  |   |       
|--------------------------- |  | ---- | ------ | -------------------- | - | --------------------- |  | ------------------- | - |  | - | ------
|                            |  | Cost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Estimated FairValue
|As of March 31, 2009:       |  |      |        |                      |   |                       |  |                     |   |  |   |       
|Cash and money market funds |  | $    | 6,561  |                      | $ |                      |  | $                   |  |  | $ | 6,561 
|U.S. Treasury securities    |  |      | 6,534  |                      |   | 5                     |  |                     |  |  |   | 6,539 
|Commercial paper*           |  |      | 5,743  |                      |   | 4                     |  |                     |  |  |   | 5,747 
|                            |  |      |        |                      |   |                       |  |                     |   |  |   |       
|                            |  | $    | 18,838 |                      | $ | 9                     |  | $                   |  |  | $ | 18,847
|                            |  |      |        |                      |   |                       |  |                     |   |  |   |       
|Reported as:                |  |      |        |                      |   |                       |  |                     |   |  |   |       
|Cash and cash equivalents   |  |      |        |                      |   |                       |  |                     |   |  | $ | 6,561 
|Short-term investments      |  |      |        |                      |   |                       |  |                     |   |  |   | 12,286
|                            |  |      |        |                      |   |                       |  |                     |   |  |   |       
|                            |  |      |        |                      |   |                       |  |                     |   |  | $ | 18,847
|                            |  |      |        |                      |   |                       |  |                     |   |  |   |       
|As of December 31, 2008:    |  |      |        |                      |   |                       |  |                     |   |  |   |       
|Cash and money market funds |  | $    | 9,933  |                      | $ |                      |  | $                   |  |  | $ | 9,933 
|U.S. Treasury securities    |  |      | 14,541 |                      |   | 32                    |  |                     |  |  |   | 14,573
|                            |  |      |        |                      |   |                       |  |                     |   |  |   |       
|                            |  | $    | 24,474 |                      | $ | 32                    |  | $                   |  |  | $ | 24,506
|                            |  |      |        |                      |   |                       |  |                     |   |  |   |       
|Reported as:                |  |      |        |                      |   |                       |  |                     |   |  |   |       
|Cash and cash equivalents   |  |      |        |                      |   |                       |  |                     |   |  | $ | 10,435
|Short-term investments      |  |      |        |                      |   |                       |  |                     |   |  |   | 14,071
|                            |  |      |        |                      |   |                       |  |                     |   |  |   |       
|                            |  |      |        |                      |   |                       |  |                     |   |  | $ | 24,506
|                            |  |      |        |                      |   |                       |  |                     |   |  |   |       



|* | All reported commercial paper is guaranteed in full by the Federal Deposit Insurance Corporation through the Temporary Liquidity Guarantee Program.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------



8



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##### Table of Contents

At March 31, 2009 and December 31, 2008, the contractual maturities of investments held were
less than one year. The Company did not sell any of its investments prior to maturity during the three months ended March 31, 2009 and 2008.

Note
4. Fair Value Measurements

The Company adopted the provisions of SFAS No. 157 effective January 1, 2008. The standard
describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.



9



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##### Table of Contents

In accordance with SFAS No. 157, the following table represents the Companys financial assets
(cash equivalents and short-term investments) measured at fair value on a recurring basis and their level within the fair value hierarchy as of March 31, 2009 and December 31, 2008 (in thousands):



|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|--------------------------------------------------------------------------------- |  | ---------------------------------------------------------- | ------ | ----------------------------------------- | - | -------------------------------------- |  | ----- | - |  | - | ------
|                                                                                  |  | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) |        | SignificantOtherObservableInputs(Level
2) |   | SignificantUnobservableInputs(Level 3) |  | Total
|Fair Value Measurements at March 31, 2009:                                        |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Components of cash equivalents and short-term investments measured at fair value: |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Money market funds                                                                |  | $                                                          | 6,021  |                                           | $ |                                       |  | $     |  |  | $ | 6,021 
|U.S. Treasury securities                                                          |  |                                                            | 6,539  |                                           |   |                                       |  |       |  |  |   | 6,539 
|Commercial paper                                                                  |  |                                                            |       |                                           |   | 5,747                                  |  |       |  |  |   | 5,747 
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Total financial assets measured at fair value                                     |  | $                                                          | 12,560 |                                           | $ | 5,747                                  |  | $     |  |  |   | 18,307
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Components of cash and cash equivalents not measured at fair value:               |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Operating cash                                                                    |  |                                                            |        |                                           |   |                                        |  |       |   |  |   | 540   
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Total cash and cash equivalents and short-term investments                        |  |                                                            |        |                                           |   |                                        |  |       |   |  | $ | 18,847
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Fair Value Measurements at December 31, 2008:                                     |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Components of cash equivalents and short-term investments measured at fair value: |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Money market funds                                                                |  | $                                                          | 9,496  |                                           | $ |                                       |  | $     |  |  | $ | 9,496 
|U.S. Treasury securities                                                          |  |                                                            | 14,573 |                                           |   |                                       |  |       |  |  |   | 14,573
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Total financial assets measured at fair value                                     |  | $                                                          | 24,069 |                                           | $ |                                       |  | $     |  |  |   | 24,069
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Components of cash and cash equivalents not measured at fair value:               |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Operating cash                                                                    |  |                                                            |        |                                           |   |                                        |  |       |   |  |   | 437   
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Total cash and cash equivalents and short-term investments                        |  |                                                            |        |                                           |   |                                        |  |       |   |  | $ | 24,506
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       

Note 5. Stockholders Equity

2000 Stock Incentive Plan and 2007 Stock Plan

During the three months ended March 31,
2009, the Company granted options to purchase a total of 647,142 shares of the Companys common stock to employees with a fair value of approximately $526,000 that is expected to be amortized through 2014, as of March 31, 2009. During the
three months ended March 31, 2008, the Company granted options to purchase a total of 317,250 shares of the Companys common stock to employees with a fair value of approximately $1,093,000 that is expected to be amortized through 2012.

Of the options granted during the three months ended March 31, 2009, options to purchase a total of 256,892 shares of the
Companys common stock were granted to executive officers as part of their 2008 bonus consideration. In an effort to conserve the Companys cash resources, all executive officers were paid 50% of the earned 2008 bonus amount in the form of
cash, with the remainder paid in stock options. The fair value of these stock options was approximately $202,000 and was recorded during the three months ended March 31, 2009 as these options were vested in full upon grant.



10



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##### Table of Contents

|ITEM 2. | 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.

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 the results discussed in the forward-looking statements. Examples of such forward-looking statements include, but are not limited to, statements about or
relating to:



| |  |  | the timing of the European Commissions decision on the European Medicines Agencys, or EMEA, Committee for
Medicinal Products for Human Use, or CHMP, opinion, which recommended approval of our marketing authorization application, or MAA, for Qutenza (formerly NGX-4010) for the treatment of
peripheral neuropathic pain in non-diabetic adults either alone or in combination with other medicinal products for pain or the timing of obtaining government sponsored health-care reimbursement;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing of U.S. Food and Drug Administrations, or FDA, review of the new drug application, or NDA, for Qutenza that was submitted in October 2008 and the
potential receipt of correspondence from the FDA by the assigned Prescription Drug User Fee Act, or PDUFA, date;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the size and timing of any additional clinical trials requested by the FDA with respect to our NDA for Qutenza;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | the sufficiency of existing resources to fund our operations through at least December 31, 2009;
| | - |  | ------------------------------------------------------------------------------------------------



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



| |  |  | potential partners for commercialization of Qutenza or other product candidates in the European Union or the United States;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | efforts to expand the scope of indications in which our capsaicin-based product candidates are used, 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;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | -------------------------------------------------



11



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##### Table of Contents

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



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



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

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 described in the section of this quarterly report entitled Risk Factors, including, but not limited to, those risks and uncertainties relating
to:



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



| |  |  | the CHMPs positive opinion to the European Commission for approval of Qutenza may not result in approval by the European Commission;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | unexpected adverse side effects or inadequate therapeutic efficacy of our drug candidates could slow or prevent product approval or approval for particular
indications (including the risk that current and past results of clinical trials or preclinical studies are not indicative of future results of clinical trials, and the difficulties associated with clinical trials for pain indications);
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | positive results in clinical trials may not be sufficient to obtain FDA or European regulatory approval;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | potential for delays in or the inability to complete commercial partnership relationships;
| | - |  | ------------------------------------------------------------------------------------------



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



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



| |  |  | 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.
| | - |  | ---------------------------------------------------------------------------------------------

The following discussion should be read in conjunction with the section of this quarterly report entitled Risk Factors.

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 which 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 most advanced product candidate, Qutenza, a dermal patch containing a high concentration of
synthetic capsaicin, is designed to manage pain associated with peripheral neuropathic pain conditions.



12



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##### Table of Contents

We submitted to the FDA an NDA for Qutenza for the management of pain associated with PHN in October 2008
which was filed by the FDA in December 2008. Our NDA has a PDUFA date of August 16, 2009, at which time we anticipate receiving a complete response letter from the FDA. 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 FDA has recently requested that we conduct a study, which we believe would be relatively small and short term, to determine if application of Qutenza following
pre-treatment with an FDA-approved topical anesthetic will have a reasonably similar tolerability profile to application following the over the counter formulation of lidocaine used in our clinical trials. We are currently assessing this request. If
we are required to conduct an additional study and submit additional data, this would likely result in an extension of the FDAs review timeline for the Qutenza NDA.

In September 2007 we submitted a MAA for Qutenza with the EMEA under the centralized procedure, seeking approval of Qutenza. On March 19, 2009, the CHMP issued a positive opinion recommending the approval of our
MAA for Qutenza for the treatment of peripheral neuropathic pain in non-diabetic adults either alone or in combination with other medicinal products for pain. In conjunction with issuing this recommendation, the CHMP requested us to perform certain
clinical evaluations of Qutenza following approval. We are currently awaiting the European Commissions decision on the CHMP opinion, a process which normally takes approximately 60 to 90 days. A European Commission decision approving our MAA
would constitute approval to market Qutenza in the European Union. If the European Commission approves the MAA, product pricing for government sponsored health-care reimbursement will need to be negotiated in most countries of the European Union,
and for hospital-based products, product pricing may need to be established directly with hospitals. We believe this process can take months or substantially longer to complete, if at all.

Our earlier stage product candidate pipeline consists of:



| |  |  | NGX-1998, a non-patch 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 is currently being considered for entry into Phase 2 evaluation. The other product candidates
are all in the pre-clinical stage of development.

In response to the generally weak economic conditions which have resulted in a
challenging environment for raising capital, we deferred further pre-clinical and clinical development activities for all of our product candidates in order to focus our fiscal and human resources on the prosecution of our MAA and NDA for Qutenza
and on continuing support of our strategies for obtaining adequate reimbursement for Qutenza in the United States. We expect to re-initiate some or all of our development programs if additional funds become available or, if necessary, in support of
our regulatory activities. We hold worldwide commercial rights to all of our product candidates and are actively engaged in discussions with potential commercial partners. Further, we are currently seeking development partners for our acetaminophen
and opioid prodrug product candidates.



13



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##### Table of Contents

We were incorporated in 1998 as Advanced Analgesics, Inc., and commenced operations in 2000 as NeurogesX,
Inc. From inception through 2001 our primary activities were related to formulation development and preclinical studies of our lead product candidate, Qutenza. Since 2002, our focus has expanded to include clinical development of Qutenza,
establishing sources of supply and manufacturing processes for Qutenza and, more recently, regulatory activities including those related to our MAA and NDA. Our focus has also expanded to include preparation for potential commercialization of
Qutenza should marketing approval be attained and seeking commercial partners for Qutenza. Additionally, we have begun development programs for NGX-1998, a liquid formulation of the same active ingredient used in Qutenza, as well as limited
preclinical development of certain prodrug product candidates.

We are a development stage company. To date, we have not generated any
revenues and have funded our operations primarily by selling equity securities and establishing debt facilities. We have incurred significant losses since our inception. As of March 31, 2009, we had a deficit accumulated during the development
stage of approximately $194.7 million, of which approximately $38.9 million represents non-cash charges for the accretion of redeemable convertible preferred stock. We had cash, cash equivalents and short-term investments totaling $18.8 million
at March 31, 2009 and during the first quarter of 2009, we used cash of $4.5 million in operating activities and approximately $1.1 million in repayment of our notes payable. We expect to continue to incur annual operating losses over the next
several years and those losses may increase as we continue our efforts to gain marketing approval for Qutenza in the United States and the European Union, prepare for potential commercialization if Qutenza is approved for marketing, and resume
development of our product candidates. With respect to our notes payable, at March 31, 2009, the outstanding balance was approximately $2.0 million. This balance is scheduled to be fully repaid by January 2010.

Critical Accounting Policies and Significant Judgments and Estimates

As of the date of the filing of this quarterly report, we believe that there have been no material changes to our critical accounting policies during the three months ended March 31, 2009 compared to those
discussed in our 2008 Form 10-K, filed on March 26, 2009.

Results of Operations

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, and costs associated with preparation and filing of regulatory submissions.

Since our inception, Qutenza has accounted for in excess of 90% of our external research and development expenses, although Qutenza has been declining as
a percentage of our external research and development expenses in recent years due to the completion of clinical studies evaluating Qutenza and the relative increase in spending related primarily to our NGX-1998 development program. Specifically, in
the three months ended March 31, 2009 and 2008, our external research and development costs totaled $0.5 million and $3.4 million, respectively, and of these amounts 96% and 92%, respectively, were incurred in programs related to Qutenza.
We commence tracking the separate, external costs of a project when we determine that a project has a reasonable chance of entering clinical development. We use our internal research and development resources across several projects and many
resources are not attributable to specific projects. Accordingly, we do not account for our internal research and development costs on a project basis. However, 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.

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



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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 product candidates. Currently we are primarily focused on completing the development, through regulatory approval, of
our lead product candidate, Qutenza, for patients with PHN in the United States and for patients with peripheral neuropathic pain conditions in the European Union. Our MAA for Qutenza received, in March 2009, a positive opinion from the CHMP
recommending approval for the use of Qutenza for peripheral neuropathic pain in non-diabetic adults either alone or in combination with other medicinal products for pain. We are currently awaiting the European Commissions decision on the CHMP
opinion, a process which normally takes approximately 60 to 90 days. We also submitted an NDA in the United States for Qutenza for the management of pain associated with PHN in October 2008, and the NDA was filed by the FDA in December 2008. Our NDA
has been given a PDUFA date of August 16, 2009, at which time we anticipate receiving a complete response letter from the FDA. 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 FDA has recently requested that we conduct a study, which we believe would be relatively small and short term, to determine if application of Qutenza following pre-treatment with an FDA-approved topical
anesthetic would have a reasonably similar tolerability profile to application following the over the counter formulation of lidocaine used in our clinical trials. We are currently assessing this request. If we are required to conduct an additional
study and submit additional data, this would likely result in an extension of the FDAs review timeline for the Qutenza NDA. We anticipate that our overall research and development expenses, excluding non-cash stock-based compensation expense
will remain substantially below historical levels until we attain additional funding to support further development activities in Qutenza, NGX-1998 and our other development programs.

Our general and administrative expenses consist primarily of salaries and benefits, professional fees related to our administrative, finance, human
resource, legal and information technology functions, marketing expenses, 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 general and administrative expenses will increase in absolute dollars and also as a percentage of total expenses over the next several years if we obtain additional capital. These increases
are likely to be attributable to increasing marketing activities in anticipation of and upon receipt of, required regulatory approvals, the costs of hiring and deploying a sales force in the United States and infrastructure costs to support a
commercial launch of our product should we achieve FDA approval, 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.

Comparison of Three Months Ended March 31, 2009 and 2008



|                                    |  |                                    |        |   |                    |   |        |                      |  |   |        |   |  |      |   
|----------------------------------- |  | ---------------------------------- | ------ | - | ------------------ | - | ------ | -------------------- |  | - | ------ | - |  | ---- | --
|                                    |  | Three Months EndedMarch 31,        |        |   | Increase(Decrease) |   |        | % Increase(Decrease) | 
|                                    |  | 2009                               |        |   | 2008               |   |        |                     
|                                    |  | (in thousands, except percentages) |       
|Research and development expenses   |  | $                                  | (2,326 | ) |                    | $ | (5,781 | )                    |  | $ | (3,455 | ) |  | (60  | %)
|General and administrative expenses |  |                                    | (2,189 | ) |                    |   | (2,487 | )                    |  |   | (298   | ) |  | (12  | %)
|Interest income                     |  |                                    | 33     |   |                    |   | 504    |                      |  |   | (471   | ) |  | (93  | %)
|Interest expense                    |  |                                    | (120   | ) |                    |   | (243   | )                    |  |   | (123   | ) |  | (51  | %)
|Other income (expense), net         |  |                                    |       |   |                    |   | 17     |                      |  |   | (17    | ) |  | (100 | %)

Research and Development Expenses. Research and development expenses decreased
approximately $3.5 million, or 60%, to $2.3 million for the three months ended March 31, 2009 from $5.8 million for the same period in 2008. 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 primarily as a result of a $2.1 million decrease in clinical study costs
associated with Qutenza. No clinical activity occurred in the first quarter of 2009 whereas in the first quarter of 2008, we were in the process of winding down our most recent Phase 3 clinical trial. Also contributing to the year over year change
was a



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$0.5 million decrease in employee related costs commensurate with our reduced clinical trial activity. Additionally, there was a $0.3 million decrease
related to manufacturing costs in support of Qutenza due to the timing of our manufacturing development activities in support of our regulatory submissions. Additional decreases include a $0.3 million decrease in spending related to NGX-1998 and our
earlier stage product candidates as we deferred further development until additional funding is obtained, a $0.3 million reduction in regulatory expenses associated with the preparation of our NDA in the first quarter of 2008 and support for our
MAA, and a $0.1 million decrease in external quality assurance costs associated with clinical trial activity in the first quarter of 2008.

General and Administrative Expenses. General and administrative expenses decreased approximately $0.3 million, or 12%, to $2.2 million for the three months ended March 31, 2009 from $2.5 million for the same period in 2008. The
year over year change was due to a $0.2 million decrease in certain pre-commercialization activities including marketing materials development as well as the timing of certain activities related to our reimbursement strategies, as well as a $0.1
million reduction in marketing employee related expenses.

Interest income. Interest income decreased approximately $0.5 million, or
93%, to less than $0.1 million for the three months ended March 31, 2009 from $0.5 million for the same period in 2008. The year over year change was primarily attributable to a decrease in our average investment balances. Also contributing to
the decrease was a decline 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.

Interest expense. Interest expense decreased approximately $0.1 million, or 51%, to $0.1 million for the three months ended March 31, 2009
from $0.2 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 repayment of principal on those notes payable.

Liquidity and Capital Resources

Since our inception
through March 31, 2009, we have financed our operations primarily through private placements and a public offering of our equity securities and, to a lesser extent, through debt facilities. Through March 31, 2009, we have received
approximately $158.7 million from the sale of our equity securities, net of issuance costs. 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 additional net cash proceeds of $2.3 million.

As of March 31, 2009, we had approximately $18.8 million in cash, cash equivalents and short-term investments and working capital of $14.9
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 liquidity and capital preservation. 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. In response to a broad based tightening of credit and worsening economic environment in the fourth quarter of 2008, and to protect the principal balances and
maintain liquidity of our investments, we have, over time, converted all of our investment holdings into U.S. Treasury or money market funds consisting of only U.S. Treasury securities



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and commercial paper guaranteed in full by the Federal Deposit Insurance Corporation through the Temporary Liquidity Guarantee Program as of March 31,
2009. Our sales of investments in other than U.S. Treasury securities in 2008 were generally conducted at or near cost, however certain individual investments were sold at either a gain or loss that were not material individually or in the
aggregate.

Net cash used in operating activities was approximately $4.5 million and $8.3 million during the three months ended
March 31, 2009 and 2008, respectively. Net cash used in each of these periods was primarily a result 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. Included in net cash used in operating activities are net changes in assets and liabilities affecting cash. In the three months ended March 31, 2009, a significant
decrease in accrued research and development was included in net cash used in operating activities related to the final payments associated with our most recent Phase 3 clinical trial. Also included in net cash used in operating activities in the
2009 period was a significant decrease in accrued compensation, primarily related to the partial payment of cash bonuses earned in 2008. In the three months ended March 31, 2008, there was a significant reduction in accounts payable and other
accrued expenses, partially offset by a significant increase in accrued research and development due to the timing of research and development activities as well as the timing of our payments to our suppliers, vendors and employees.

Net cash provided by investing activities was approximately $1.7 million during the three months ended March 31, 2009 and net cash used in investing
activities was approximately $12.2 million during the three months ended March 31, 2008. Investing activities consist primarily of the purchase and maturity of marketable securities. The net cash provided by investing activities during the
three months ended March 31, 2009 reflected maturities of marketable securities in excess of the amount purchased during this period. Net cash used in investing activities during the three months ended March 31, 2008 reflected the
investment of a majority of the net proceeds generated from our private placement of common stock and warrants, completed in January 2008, in short-term investments in the 2008 period. Purchases of property and equipment were not significant during
these periods. We expect that property and equipment expenditures may increase if our NDA for Qutenza is approved by the FDA. Such increase is expected to relate to the capital needs for infrastructure to support commercial operations.

Net cash used in financing activities was approximately $1.1 million during the three months ended March 31, 2009 and net cash provided by
financing activities was approximately $1.3 million during the three months ended March 31, 2008. Financing activities consisted of principal repayments on our venture loan financing arrangements in both periods. However, these principal
repayments were offset in the 2008 period by net proceeds from the sale of our common stock and warrants.

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



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



| |  |  | the conduct of manufacturing activities including process development and manufacture of clinical product supply and potentially commercial product supply;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the scope and cost of pre-commercial activities;
| | - |  | ------------------------------------------------



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



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



| |  |  | the costs and timing of any post-approval regulatory commitments;
| | - |  | -----------------------------------------------------------------



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



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



| |  |  | 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 March 31, 2009, we had approximately $18.8 million in cash, cash equivalents and short-term investments and the balance of our notes payable
totaled approximately $2.0 million. During the three months ended March 31, 2009, we used a total of approximately $4.5 million in operating activities and approximately $1.1 million in the repayment of notes payable. We currently anticipate
that our quarterly cash uses will remain at approximately these levels until such time as we are able to secure additional funding to increase our investment in pre-commercialization activities and advance our development programs. As a result, we
anticipate that our existing cash and investments will be sufficient to meet our projected operating requirements through at least December 31, 2009. Additionally, should we achieve market approval in the United States and if additional
resources become available, we expect that our cash uses will increase to support additional pre-launch activities as well as launch related activities.

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 as well as potentially through strategic collaboration agreements, debt financing or the sale of other equity securities. However, we may not be successful in obtaining
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 further 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, if
approved for marketing, 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.

Contractual Obligations

There have been no material changes to our disclosures regarding contractual obligations set forth in our 2008 Form 10-K, filed on March 26, 2009.



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

We believe there has been no material change in our exposure to market risk from that discussed in our Form 10-K filed for the year ended December 31, 2008.



|ITEM 4T. | CONTROLS AND PROCEDURES
|-------- | -----------------------

(a) Evaluation of
disclosure controls and procedures

Our management evaluated, with the participation and under the supervision of our Chief Executive
Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer have concluded, subject to the limitations described below, that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission, or SEC, rules and forms, and that such information is accumulated and communicated to management as
appropriate to allow timely decisions regarding required disclosures.

(b) Changes in internal control over financial reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

(c) Limitations on
the Effectiveness of Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the controls are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met.



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PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

None.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

You should consider carefully the
risk factors described below, and all other information contained in or incorporated by reference in this Quarterly Report on Form 10-Q before making an investment decision. If any of the following risks actually occur, they may materially harm our
business, financial condition, operating results or cash flows. As a result, the market price of our common stock could decline, and you could lose all or part of your investment. Additional risks and uncertainties that are not yet identified or
that we think are immaterial may also materially harm our business, operating results or financial condition and could result in a complete loss of your investment.

Risks Related to our Business

Our success depends on our ability to obtain U.S. regulatory
approval for our lead product candidate, Qutenza.

Our success depends substantially on obtaining regulatory approval for our most
advanced product candidate, Qutenza, a dermal patch containing a high concentration of synthetic capsaicin. Regulatory approval in the United States requires the completion of extensive non-clinical and clinical evaluation of a product candidate to
demonstrate substantial evidence of safety and efficacy of the product candidate, as well as development of manufacturing processes which demonstrate the ability to reliably and consistently produce the product candidate under current Good
Manufacturing Practice regulations. Each of these elements of our Qutenza development program include certain judgments of applicable regulatory requirements of what will ultimately be deemed acceptable to the regulatory authority including the
FDAs evaluation of additional data, such as a responder analysis and other secondary endpoints when evaluating whether our product can be approved. The FDA in reviewing our application will evaluate all components of that program
including conducting audits of clinical sites used in our clinical trials and inspecting our manufacturing sites to ensure compliance with regulatory requirements. There can be no assurance that any or all aspects of our development program or our
manufacturing processes will satisfy the regulatory requirements for approval, the failure of which to do so would significantly delay or even prevent approval of our product candidate and seriously harm our ability to generate revenue. Qutenza has
been evaluated in three completed Phase 3 clinical trials for the management of pain associated with PHN, one of which did not meet its primary endpoint, and two completed Phase 3 clinical trials for the management of pain associated with HIV-DSP,
one of which did not meet its primary endpoint. The FDA generally requires successful completion of at least two adequate and well-controlled Phase 3 clinical trials for each indication for which we seek marketing approval before submission of an
NDA. Although our analyses of two Phase 3 studies in PHN indicated that their primary endpoints were met, the FDA may not agree with our analyses and may require that we complete additional studies or perform other activities to support an approval
of the PHN indication. We may not have adequate financial or other resources to pursue this product candidate through regulatory approval or through commercialization. If we do not receive marketing approval from the FDA we will not be able to
commercialize Qutenza in the United States. Further, if the FDA delays approval as a result of requirements to conduct additional clinical studies, remediation of manufacturing deficiencies, or for other reasons, commercialization of Qutenza could
be significantly delayed. The FDA has recently requested that we conduct a study to determine if application of Qutenza following pre-treatment with an FDA-approved topical anesthetic would have a reasonably similar tolerability profile to
application following the over the counter formulation of lidocaine used in our clinical trials. We are currently assessing this request. If we are required to conduct an additional study and submit additional data, this would likely result in an
extension of the FDAs review timeline for the Qutenza NDA. We do not currently know the scope of the study that the FDA may require us to undertake, nor the time it would take to complete such study. Significant delay in obtaining such
approval or the inability to obtain such approval to



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commercialize Qutenza in the United States would significantly harm our business and as a result we may be unable to become profitable or continue our
operations, or, even if we are able to commercialize in the United States, there can be no assurance that we can become profitable. As a consequence of any of these factors, our stock price would be adversely affected. The NDA we have filed with the
FDA seeks approval for the use of Qutenza for PHN. We are continuing to evaluate whether to seek approval for Qutenza in HIV-DSP and whether additional studies would be necessary to achieve such an approval. If we decide to seek approval in HIV-DSP,
we would do so no sooner than after the FDA has completed its review of the PHN NDA submission. Further, we may decide not to conduct further Qutenza studies in HIV-DSP and ultimately may not seek approval of Qutenza in the HIV-DSP indication, in
which case our potential revenues could be negatively impacted.

We may not be successful in obtaining European regulatory approval
for Qutenza.

On March 19, 2009, we received a positive opinion recommending the approval of our MAA from the CHMP for Qutenza
for the treatment of peripheral neuropathic pain in non-diabetic adults either alone or in combination with other medicinal products for pain. We are currently awaiting the European Commissions decision on the CHMP opinion, a process which
normally takes approximately 60 to 90 days. However, there can be no assurance that the European Commission will adopt the CHMPs opinion and approve the MAA for Qutenza. A decision by the European Commission to not adopt the recommendation of
the CHMP would cause us to not be able to commercialize Qutenza in Europe and consequently, our ability to generate revenue would be significantly harmed.

If the European Commission approves the MAA, product pricing for government sponsored health-care reimbursement will need to be negotiated in most countries of the European Union, and for hospital-based products,
product pricing may need to be established directly with hospitals. We believe this process can take months or substantially longer to complete, if at all.

We will require substantial additional funding and may be unable to raise capital when needed.

We had cash, cash equivalents and short-term investments totaling $18.8 million at March 31, 2009 and during the three months ended March 31, 2009, we used a total of $4.5 million in operating activities and approximately $1.1
million in the repayment of notes payable. Although we have deferred clinical programs and reduced our planned spending for 2009 until such time as additional resources are attained, we expect our negative cash flows from operations to continue
beyond potential regulatory approval and product launch of Qutenza and there can be no assurance that we will ever achieve positive cash flows from operations. We believe, based on our current operating plan that our cash, cash equivalents and
short-term investments will be sufficient to fund our operations through at least December 31, 2009. However, our planned activities beyond 2009 including the establishment of a sales and marketing organization to launch Qutenza, if approved,
in the United States along with continuing our development programs for Qutenza, NGX-1998 and our other development programs will require substantial additional funding. There can be no assurance that additional funding will be available on terms
that are acceptable, if at all.

We have no manufacturing capabilities and depend on other parties for our manufacturing operations.
If these manufacturers fail to meet our requirements and strict regulatory requirements, our product development efforts may be negatively affected, we may not be able to obtain regulatory approval for our product candidates and our
commercialization efforts may be materially harmed.

We currently depend on three contract manufacturers as single source suppliers
for the components of our Qutenza product candidate: synthetic capsaicin, the dermal patch and the associated cleansing gel. We have entered into long term commercial supply agreements for these components. In addition we anticipate



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entering into long-term agreements for the assembly of the Qutenza treatment kits in the United States and the European Union. If our relationship with any
of these manufacturers is terminated, or if any manufacturer is unable to produce required quantities on a timely basis or at all, our operations would be delayed and our business harmed.

Our reliance on contract manufacturers exposes us to additional risks, including:



| |  |  | failure of our current and future manufacturers to comply with strictly-enforced regulatory requirements;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | failure of our current and future manufacturers to complete the development and scale-up of the manufacturing process including adequately analyzing and documenting
the source and chemical make-up of ingredients that make up our product candidate and the ability to reliably and consistently produce the product candidate under current Good Manufacturing Practice regulations;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | failure to manufacture to our specifications, or to deliver sufficient quantities in a timely manner;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | the possibility that we may terminate a contract manufacturer and need to engage a replacement;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | the possibility that our current and future manufacturers may not be able to manufacture our product candidates and products without infringing the intellectual
property rights of others;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the possibility that our current and future manufacturers may not have adequate intellectual property rights to provide for exclusivity and prevent competition; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | insufficiency of intellectual property rights to any improvements in the manufacturing processes or new manufacturing processes for our products.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

Any of these factors could result in significant delay or suspension of our clinical trials, regulatory submissions,
receipt of required approvals or commercialization of our products and harm our business.

Before a new drug can be marketed in the United
States, three consecutive manufacturing runs have to be completed and those manufacturing runs need to be validated to ensure that manufacturing processes are reliable. Required validation of the manufacturing processes of our third party suppliers
to secure FDA approval for Qutenza has not yet been completed. While our plans contemplate having these process validations complete in 2009, if validation of our third party supplier manufacturing processes is delayed or if our suppliers fail to
complete the requisite validation batches, even if all other aspects of our NDA are approvable by the FDA, commercial sales in the United States may need to be delayed until validation can be successfully completed, if at all.

In addition, because our third party manufacturers operate outside of the United States, and many of the raw materials and the labor that are used to
manufacture our product candidates are based in foreign countries, we may experience currency exchange rate risks, even though, in some instances our contracts are denominated in U.S. dollars. We do not currently engage in forward contracts to hedge
this currency risk and as a result, may suffer adverse financial consequences as a result of this currency risk.

Further, materials used
by these entities to manufacture our product candidates originate outside the United States, including certain materials which may be sourced from China and India. The FDA has increased its diligence with regard to foreign sourced materials and
manufacturing processes which may result in increased costs of maintaining foreign manufacturing and could lengthen or delay the regulatory review process required to gain approval for our product candidates and could potentially prevent approval of
our product candidates.



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We must enter into an agreement with, and depend upon, one or more partners to assist us in
commercializing our lead product candidate, Qutenza, in Europe.

Because of our limited financial and other resources, we must
actively seek and enter into a collaboration with one or more European partners to assist us in our planned European Qutenza launch, if marketing approval is granted. Any collaboration agreement we enter into may contain unfavorable terms, for
example, with respect to product candidates covered, control over decisions and responsibilities, termination rights, payment, and other significant terms. Our ability to receive any significant revenue from our product candidates covered by the
collaboration agreement will be dependent on the efforts of our collaboration partner and may result in lower levels of income to us than if we marketed our product candidates entirely on our own. The collaboration partner may not fulfill its
obligations or commercialize our product candidates as quickly as we would like. We could also become involved in disputes with our partner, which could lead to delays in or termination of our commercialization programs and time-consuming and
expensive litigation or arbitration. If a collaboration partner terminates or breaches its agreement with us, or otherwise fails to complete its obligations in a timely manner, the chances of successfully developing or commercializing our product
candidates would be materially and adversely affected.

Additionally, depending upon the collaboration partner that we choose, other
companies that might otherwise be interested in developing products with us could be less inclined to do so because of our relationship with the collaboration partner. If our ability to work with present or future strategic partners or collaborators
is adversely affected as a result of our collaboration agreement, our business prospects may be limited and our financial condition may be adversely affected. There can be no assurance that we will be able to enter into a collaboration for
commercialization in Europe, or that if we do, it is on a time frame and on economic terms that are favorable to us. Further, although the CHMP has issued a positive opinion recommending the approval of our MAA for Qutenza for the treatment of
peripheral neuropathic pain in non-diabetic adults, there can be no assurance that the European Commission will support the recommendation and accordingly, our efforts to complete a European commercial partnership may be delayed or we may be unable
to complete a European commercial partnership.

Our product candidates may never achieve market acceptance even if we obtain
regulatory approvals.

Even if we receive regulatory approvals for the commercial sale of our product candidates, the commercial
success of these product candidates will depend on, among other things, acceptance by physicians and patients. Market acceptance of, and demand for, any product that we develop and commercialize will depend on many factors, including:



| |  |  | our ability to provide acceptable evidence of safety and efficacy;
| | - |  | ------------------------------------------------------------------



| |  |  | our ability to obtain adequate pricing and sufficient insurance coverage and reimbursement;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | availability, relative cost and relative efficacy and safety of alternative and competing treatments;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | the effectiveness of our or our collaborators sales, marketing and distribution strategy;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | publicity concerning our products or competing products and treatments; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | our ability to produce product in commercial quantities sufficient to meet demand.
| | - |  | ----------------------------------------------------------------------------------



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If our product candidates fail to gain market acceptance, we may be unable to earn sufficient revenue to
continue our business.

If physicians are not adequately reimbursed for their time and services in administering Qutenza, it is
likely that they will not prescribe Qutenza.

Because many people suffering from PHN are elderly, in order for Qutenza to be
economically viable for this indication in the United States, we will need Medicare coverage for Qutenza, if Qutenza is approved by the FDA for marketing. Medicare policymakers or local contractors that process claims for Medicare may determine that
Qutenza is not reasonable and necessary for Medicare beneficiaries or is reasonable and necessary only under limited circumstances. If Medicare policymakers or a significant portion of contractors determine that Qutenza is not reasonable
and necessary for and deny or significantly limit reimbursement for Qutenza, our business would be harmed, not only because Medicare beneficiaries represent a substantial portion of our target market, but also because Medicares coverage
decisions would likely affect the determination of many state Medicaid programs and private payors.

Even if Qutenza is covered by
Medicare, we cannot determine whether that coverage will be primarily under Medicare Part B or Medicare Part D. Although products administered by, or under the supervision of, a physician, as we expect Qutenza will be, are ordinarily
covered by Medicare Part B, which also reimburses the physician for services in administering the product, Medicare Part B does not currently provide reimbursement for the use of topical patches in the treatment of peripheral neuropathic
pain. Obtaining coverage for Qutenza and its related administration under Part B is important to our future success, and there is a possibility that our efforts to achieve such a change in a policy will not be successful or if successful, will
likely take one or more years to achieve. Any delay in achieving reimbursement under Part B will have a negative impact on our ability to generate revenues.

Part D may provide reimbursement for Qutenza, but we do not view Part D coverage as being as favorable as Part B coverage, because each Part D plan establishes its own formulary and may or may not
decide to include Qutenza, or if it does, may seek to negotiate significantly lower prices in order to include the product in their formularies. Additionally, Part D does not include reimbursement for the physicians administration of the
product, although such services may be covered under existing evaluation and management codes available for reimbursement of office visits. Patient preparation and Qutenza application time is significant and may take two hours or longer, which
significantly impacts a physicians ability to see other patients and, consequently, the physicians revenue. If physicians are not adequately reimbursed for their time and services in administering Qutenza, it is likely that they will not
prescribe Qutenza, which would significantly impair our ability to obtain revenues.

We also will need to obtain favorable coverage and
reimbursement decisions for Qutenza from private insurers, including managed care organizations. We expect that private insurers will consider the efficacy, cost-effectiveness and safety of Qutenza in determining whether to provide reimbursement for
Qutenza and at what level. Obtaining these coverage and reimbursement decisions will be a time consuming process requiring substantial resources and we may not receive adequate reimbursement of Qutenza from private insurers.

We expect to experience pricing pressures in connection with the sale of Qutenza, if approved, and our potential future products, due to the trend toward
programs and legislation aimed at reducing healthcare costs, as well as the increasing influence of managed care organizations. In many foreign countries, particularly the countries of the European Union, the pricing of prescription drugs is subject
to direct



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governmental control and is influenced by drug reimbursement programs that employ a variety of price control mechanisms. In these countries, pricing
negotiations with governmental authorities or reimbursement programs can take 6 to 12 months or longer after the receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be
required to conduct additional studies, such as a study to evaluate the cost-effectiveness of Qutenza compared to other currently available therapies. If reimbursement for Qutenza is unavailable, delayed or limited in scope or amount or if pricing
is set at unsatisfactory levels, our business would be materially harmed.

If we are unable to establish a sales, marketing and
distribution infrastructure or enter into collaborations with partners to perform these functions, we will not be successful in commercializing our product candidates.

In order to commercialize any of our product candidates successfully, we must either acquire or internally develop a capable sales, marketing and
distribution infrastructure or enter into collaborations with partners to perform these services for us. The acquisition or development of a capable sales, marketing and distribution infrastructure will require substantial resources, which may
divert the attention of our management and key personnel and negatively impact our product development efforts. We intend to enter into partnering or other distribution arrangements for commercialization outside the United States. While we currently
intend to develop a direct sales and marketing organization in the United States for Qutenza, because we believe that we can best serve our target customers with a focused, specialty sales force, we are currently evaluating the potential for
commercializing Qutenza in the United States with a collaboration partner. If we enter into an agreement with a collaboration partner in the United States, such a collaboration may negatively impact our ability to seek additional strategic
relationships and/or may negatively impact the value of your investment in us. Factors that may inhibit our efforts to develop an internal sales, marketing and distribution infrastructure include:



| |  |  | lack of available financial resources;
| | - |  | --------------------------------------



| |  |  | our inability to recruit and retain adequate numbers of effective sales and marketing personnel;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | the inability of sales personnel to obtain access to or convince adequate numbers of physicians to prescribe our products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive
product lines; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unforeseen costs and expenses associated with creating a sales and marketing organization.
| | - |  | ------------------------------------------------------------------------------------------

We also may not be able to enter into collaborations on acceptable terms, if at all, and we may face competition in our search for partners with whom we
may collaborate. If we are not able to build a sales, marketing and distribution infrastructure or collaborate with a partner to perform these functions, we may be unable to commercialize our product candidates successfully, which would adversely
affect our business and financial condition.



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Even if our product candidates receive regulatory approval, they will be subject to ongoing
regulatory requirements, including possible commitments by us to perform post market authorization activities, and may face regulatory or enforcement action.

Any product candidate for which we receive regulatory approval will be subject to significant review and ongoing and changing regulation by the FDA, the EMEA and other regulatory agencies. These ongoing regulatory
requirements may include, but are not limited to:



| |  |  | obtaining additional post-approval clinical study data;
| | - |  | -------------------------------------------------------



| |  |  | regulatory review of advertising, promotional and education activities for the product;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | establishment and monitoring of pharmacovigilance programs; and
| | - |  | ---------------------------------------------------------------



| |  |  | periodic regulatory agency inspections and reviews of our third-party manufacturing facilities and processes.
| | - |  | -------------------------------------------------------------------------------------------------------------

Failure to comply with regulatory requirements may subject us to administrative and judicially-imposed sanctions. These may include warning letters,
adverse publicity, civil and criminal penalties, injunctions, product seizures or detention, product recalls, total or partial suspension of production, and refusal to approve pending product marketing applications.

Even if we receive regulatory approval to market a particular product candidate, the approval could be conditioned on us conducting additional costly
post-approval studies or could limit the indicated uses included in our labeling. For example, the positive opinion of the CHMP recommending approval of Qutenza in the European Union, if adopted by the European Union, requires us to conduct certain
post authorization commitments including ongoing evaluations of safety of Qutenzas use in the labeled indications as well as clinical evaluation in patients with PDN, although the timing of clinical evaluations in PDN has not yet been
determined. These studies may prove to be expensive and difficult to complete and the results of these studies may identify safety, efficacy or other issues related to Qutenza use that could be harmful to us. Moreover, the product may later be found
to cause adverse effects that limit or prevent its widespread use, force us to withdraw it from the market or impede or delay our ability to obtain regulatory approvals in additional countries.

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

The use of our product candidates in clinical trials and the sale of any
products for which we obtain marketing approval expose us to the risk of product liability claims. Product liability claims might be brought against us by consumers, health care providers, pharmaceutical companies or others selling our products. If
we cannot successfully defend ourselves against these claims, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:



| |  |  | decreased demand for our product candidates;
| | - |  | --------------------------------------------



| |  |  | impairment of our business reputation;
| | - |  | --------------------------------------



| |  |  | withdrawal of clinical trial participants;
| | - |  | ------------------------------------------



| |  |  | costs of related litigation;
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| |  |  | substantial monetary awards to patients or other claimants;
| | - |  | -----------------------------------------------------------



| |  |  | loss of revenues; and
| | - |  | ---------------------



| |  |  | the inability to commercialize our product candidates.
| | - |  | ------------------------------------------------------

Although we currently have product liability insurance coverage for our clinical trials with limits that we believe are customary and adequate to provide us with coverage for foreseeable risks associated with our
product candidate development efforts, our insurance coverage may not reimburse us or may be insufficient to reimburse us for the actual expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and, in the
future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We intend to expand our insurance coverage to include the sale of commercial products if we obtain
marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing.

We face substantial competition which may result in others discovering, developing or commercializing products before or more successfully than us.

If Qutenza receives marketing approval, it will compete against more established products marketed by large pharmaceutical
companies with far greater name recognition and resources than we have. Qutenza will also compete with medications that are potentially prescribed for off-label use. 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. Gabapentin is marketed by Pfizer and multiple generic manufacturers, and is the most widely-prescribed drug in the United States for treatment of neuropathic pain. Pfizer has also
received FDA approval of Lyrica for the treatment of PDN, fibromyalgia and epilepsy. The FDA has approved Cymbalta from Eli Lilly for use in the treatment of PDN, generalized anxiety disorder, depression and fibromyalgia.

Prior to any market launch, competition may become stronger and more direct and products in development, including products that we are unaware of, may
compete with Qutenza. There are many other companies working to develop new drugs and other therapies to treat pain in general and neuropathic pain in particular, including GlaxoSmithKline, Newron Pharmaceuticals S.p.A, Depomed Inc., Novartis AG,
UCB S.A, Pfizer and Eli Lilly. Many of the compounds in development by such companies are already marketed for other indications, such as anti-depressants or anti-seizure drugs. In addition, physicians employ other interventional procedures, such as
nerve stimulation or nerve blocks, to treat patients with difficult to treat neuropathic pain conditions. Furthermore, new developments, including the development of other drug technologies and methods of preventing the incidence of disease, such as
vaccines, occur in the biopharmaceutical industry at a rapid pace. Any of these developments may render our product candidates obsolete or noncompetitive.

Many of our potential competitors, either alone or together with their partners, have substantially greater financial resources, research and development programs, clinical trial and regulatory experience, expertise
in prosecution of intellectual property rights, and manufacturing, distribution and sales and marketing capabilities than we do. As a result of these factors, our competitors may:



| |  |  | develop product candidates and market products that are less expensive, safer, more effective or involve more convenient treatment procedures than our future
products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | commercialize competing products before we can launch any of our product candidates;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | initiate or withstand substantial price competition more successfully than we can;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | have greater success in recruiting skilled scientific workers from the limited pool of available talent;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | more effectively negotiate third-party licenses and strategic alliances; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | take advantage of acquisition or other opportunities more readily than we can.
| | - |  | ------------------------------------------------------------------------------

The life sciences industry is characterized by rapid technological change. If we fail to stay at the forefront of technological change we may be unable
to compete effectively.

We may not be able to obtain Hatch-Waxman Act data exclusivity or equivalent regulatory data exclusivity
protection in other jurisdictions for Qutenza.

We intend to rely, in part, on Hatch-Waxman exclusivity for the commercialization of
Qutenza in the United States. The Hatch-Waxman Act provides five 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. Our NDA for Qutenza was filed as a 505(b)(2) application as our application referenced certain publicly available preclinical data regarding capsaicin. Therefore, if another product containing the same active ingredient as
Qutenza is approved before Qutenza, then our potential approval could be delayed by five years. However, in such event, we believe we can petition the FDA to modify our application to be under Section 505(b)(1). Such petition would require the
FDAs approval, and there can be no assurance that such petition would be granted by the FDA. While we believe that the FDA has not approved another product containing the active ingredient of Qutenza, a highly pure synthetic capsaicin, there
can be no assurance that a competing product containing a synthetic capsaicin will not achieve approval before Qutenza or that Qutenza will be able to qualify for the five-year Hatch-Waxman exclusivity.

We are aware of a company that may file an NDA for a product candidate that contains a low concentration of a closely related compound to capsaicin.
While we believe that this product, should it be approved by the FDA, may not preclude the granting of data exclusivity under Hatch-Waxman to Qutenza, we can make no assurance to such belief. If we are unable to achieve data exclusivity, our
revenues could be significantly harmed.

There can be no assurance that European authorities will grant data exclusivity to Qutenza. Even
if European data exclusivity is granted for Qutenza, that may not protect us from direct competition. Given the well-established use of capsaicin as a pain reliever, a competitor with a generic version of Qutenza may be able to obtain approval of
their product during Qutenzas period of data exclusivity, by submitting an MAA with a less than full package of preclinical and clinical data.



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Our fast track designation for development of Qutenza for treatment of painful
HIV-associated neuropathy may not actually lead to a faster development or regulatory review or approval process.

A product
intended for the treatment of a serious or life-threatening condition that demonstrates the potential to address unmet medical needs for such a condition may be submitted to the FDA for fast track designation. Although we received fast
track designation from the FDA for Qutenza for the treatment of HIV-DSP, there is no assurance that, if we decide to file an NDA for Qutenza in HIV-DSP, that we will experience a faster development process, review or approval, compared to
conventional FDA standards, or that the product will be approved at all. Further, we anticipate the FDA will, as is the case with other indications, require two successful Phase 3 studies in HIV-DSP to support an approval for that indication, and
therefore, we may never seek approval for HIV-DSP or we will likely need to conduct one or more additional Phase 3 studies prior to submission of an NDA for HIV-DSP. The FDA may also withdraw our fast track designation if it believes that the
designation is no longer supported by data from our clinical development program.

We may not be able to obtain or maintain orphan
drug exclusivity for Qutenza.

The FDA granted us orphan drug status with regard to Qutenza for the treatment of HIV-DSP. In
addition we may obtain orphan drug status for other indications, including PHN. 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that is, for seven years, the FDA may not approve any other applications to market the same drug for the same indication, except in very limited circumstances. We may be unable to obtain orphan drug designations for any additional
product candidates or exclusivity for any of our product candidates, or our potential competitors may obtain orphan drug exclusivity for capsaicin-based products competitive with our product candidates before we do, in which case we may be excluded
from that market for the exclusivity period. In addition, orphan drug designation previously granted may be withdrawn under certain circumstances. Even if we obtain orphan drug exclusivity for any of our product candidates, we may not be able to
maintain it if a competitive product based on the same active compound is shown to be clinically superior to our product. Although obtaining FDA approval to market a product with orphan exclusivity can be advantageous, there can be no assurance that
it would provide us with a significant commercial advantage.

Delays in the commencement or completion of clinical testing could
result in increased costs to us and delay our ability to generate revenues.

We do not know whether future clinical trials will
begin on time or be completed on schedule, if at all. The commencement and completion of clinical trials can be disrupted for a variety of reasons, including difficulties in:



| |  |  | availability of financial resources;
| | - |  | ------------------------------------



| |  |  | addressing issues raised by the FDA or European health authorities regarding safety, design, scope and objectives of future clinical studies;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | recruiting and enrolling patients to participate in a clinical trial;
| | - |  | ---------------------------------------------------------------------



| |  |  | obtaining regulatory approval to commence a clinical trial;
| | - |  | -----------------------------------------------------------



| |  |  | reaching agreement on acceptable terms with prospective clinical research organizations and trial sites;
| | - |  | --------------------------------------------------------------------------------------------------------



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| |  |  | manufacturing sufficient quantities of a product candidate; and
| | - |  | ---------------------------------------------------------------



| |  |  | obtaining institutional review board approval to conduct a clinical trial at a prospective site.
| | - |  | ------------------------------------------------------------------------------------------------

A clinical trial may also be suspended or terminated by us, the FDA or other regulatory authorities due to a number of factors, including:



| |  |  | failure to conduct the clinical trial in accordance with regulatory requirements or in accordance with our clinical protocols;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unforeseen safety issues; or
| | - |  | ----------------------------



| |  |  | inadequate patient enrollment or lack of adequate funding to continue the clinical trial.
| | - |  | -----------------------------------------------------------------------------------------

In addition, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes, which
could impact the cost, timing or successful completion of a clinical trial. If we experience delays in the commencement or completion of our clinical trials, the commercial prospects for our product candidates and our ability to generate product
revenues will be harmed. Many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also lead to the denial of regulatory approval of a product candidate.

Our clinical trials may fail to demonstrate adequately the safety and efficacy of our product candidates, which could prevent or delay regulatory
approval and commercialization.

Before obtaining regulatory approvals for the commercial sale of Qutenza or any other product
candidates, we must demonstrate through lengthy, complex and expensive preclinical testing and clinical trials that the product is both safe and effective for use in each target indication. Clinical trial results from the study of neuropathic pain
are inherently difficult to predict. The primary measure of pain is subjective patient feedback, which can be influenced by factors outside of our control, and can vary widely from day to day for a particular patient, and from patient to patient and
site to site within a clinical study. The results we have obtained in completed clinical trials may not be predictive of results from our ongoing or future trials. Additionally, we may suffer significant setbacks in advanced clinical trials, even
after promising results in earlier studies.

Some of our trial results have been negatively affected by factors that had not been fully
anticipated prior to our examination of the trial results. For example, as is the case in our most recent Phase 3 study in HIV-DSP, we have from time to time observed a significant placebo effect within our control groupsa
phenomenon in which a sham treatment or, in the case of our studies, a low-dose capsaicin treatment that we believed would not be effective, results in a beneficial effect Although we design our clinical study protocols to address known factors that
may negatively affect our study results, there can be no assurance that our protocol designs will be adequate or that factors that we may or may not be aware of or anticipate, will not have a negative effect on the results of our clinical trials,
which could significantly disrupt our efforts to obtain regulatory approvals and commercialize our product candidates. Furthermore, once a study has commenced, we may voluntarily suspend or terminate our clinical trials if at any time we believe
that they present an unacceptable safety risk to patients. In our completed Phase 3 trials there have been three serious adverse events (totaling less than 1%) related to Qutenza, two related to pain and one case of hypertension. In our PHN studies
C108 and C110, more cardiac adverse events occurred in subjects treated with Qutenza than



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subjects receiving the control patch. Evaluation of these adverse events did not indicate that they were treatment related. In our most recent PHN studies,
C116 and C117, a similar number of subjects in the Qutenza and control groups had cardiac events. However, future late stage clinical trials in other indications or in a larger patient population could reveal more frequent, more severe or additional
side effects that were not seen or deemed unrelated in earlier studies, any of which could interrupt, delay or halt clinical trials of our product candidates and could result in the FDA or other regulatory authorities stopping further development of
or denying approval of our product candidates. Based on results at any stage of clinical trials, we may decide to repeat or redesign a trial, modify our regulatory strategy or even discontinue development of one or more of our product candidates.

A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials,
even after obtaining promising results in earlier trials. If our product candidates are not shown to be both safe and effective in clinical trials, the resulting delays in developing other compounds and conducting associated preclinical testing and
clinical trials, as well as the potential need for additional financing, would have a material adverse effect on our business, financial condition and results of operations.

We rely on third parties to conduct our non-clinical studies and clinical trials. If these third parties do not perform as contractually required
or otherwise expected, we may not be able to obtain regulatory approval for our product candidates.

We do not currently conduct
non-clinical studies and clinical trials on our own, and instead rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to assist us with our non-clinical and clinical
trials. We are also required to comply with regulations and standards, commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and
accurate and that the trial participants are adequately protected. If these third parties do not successfully carry out their duties to us or regulatory obligations or meet expected deadlines, if the third parties need to be replaced, or if the
quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our non-clinical development activities or clinical trials may be extended, delayed,
suspended or terminated, and we may not be able to obtain regulatory approval for our product candidates.

Even though certain of our
clinical trials for Qutenza in treatment of PHN and HIV-DSP have met their primary endpoints, certain other studies in these indications have not met their primary endpoints and, our clinical trials for other indications, if we decide to conduct
them, may not succeed, which would adversely impact our long term success.

We have not prepared for or conducted any Qutenza
clinical trials for indications other than PHN, HIV-DSP and PDN. We have conducted one Phase 2 clinical trial for the use of Qutenza for the management of PDN. PDN represents a much larger market opportunity than either PHN or HIV-DSP, and unless we
successfully complete required clinical trials and obtain regulatory approvals for the use of Qutenza for PDN patients, we will be unable to market Qutenza for this indication in the United States and the European Union and possibly in other
countries. If this occurs, our long term ability to succeed will be significantly and negatively impacted. We believe that to market Qutenza in the United States for future indications, including PDN, we will have to conduct two successful Phase 3
trials for those indications, and that for PDN in particular, we may be required to perform additional safety studies. We are evaluating our development programs related to PDN in Qutenza and may decide not to conduct studies in PDN beyond those
required by the post-marketing requirements associated with our MAA. If we decide not to conduct the required number of Phase 3 studies in PDN that meet their primary endpoint, we will not gain approval for Qutenza in this indication, which will
significantly harm our ability to potentially generate revenue.



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Results of clinical trials of Qutenza for patients with PHN or HIV-DSP do not necessarily predict the
results of clinical trials involving other indications. If we decide to conduct additional clinical studies with Qutenza in PDN or other indications, those studies may fail to show desired safety and efficacy for management of pain associated with
PDN and other indications, despite results from earlier clinical trials involving PDN, PHN and/or HIV-DSP. Any failure or significant delay in completing clinical trials for Qutenza with PDN and other indications, or in receiving regulatory approval
involving such indications, may significantly harm our business.

We have limited experience in regulatory affairs.

We have limited experience in preparing, submitting and prosecuting regulatory filings including NDAs, MAAs and other applications
necessary to gain regulatory approvals. Moreover, some of our product candidates are based on novel applications of therapies that have not been extensively tested in humans, and the regulatory requirements governing these types of products may be
less well defined or more rigorous than for conventional products. As a result of these factors, in comparison to our competitors, we may require more time and incur greater costs to obtain regulatory approvals of products that we develop, license
or acquire.

We depend on our key personnel. If we are not able to retain them, our business will suffer.

We are highly dependent on the principal members of our management and scientific staff. The competition for skilled personnel among biopharmaceutical
companies in the San Francisco Bay Area is intense and the employment services of our scientific, management and other executive officers are terminable at-will. If we lose one or more of these key employees, our ability to implement and execute our
business strategy successfully could be seriously harmed. Replacing key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience
required to develop, gain regulatory approval of and commercialize products successfully. We do not carry key man life insurance on any of our key personnel.

Risks Related to Our Finances and Capital Requirements

We have incurred operating losses in each year since inception
and expect to continue to incur substantial and increasing losses for the foreseeable future.

We have not generated any revenue to
date and we have incurred operating and net losses each year since our inception in 1998. Our net loss for the three months ended March 31, 2009 was approximately $4.6 million. As of March 31, 2009 we had an accumulated deficit of
approximately $194.7 million. We had cash, cash equivalents and short-term investments totaling $18.8 million at March 31, 2009 and for the three months ended March 31, 2009, we used cash of $4.5 million in operating activities. We expect
to continue to incur losses for several years, as we seek regulatory approvals for and commercialize Qutenza, and continue other research and development activities. If Qutenza does not gain regulatory approval or does not achieve market acceptance,
we will not generate any revenue. We cannot assure you that we will be profitable even if we commercialize Qutenza. If we fail to achieve and maintain profitability, or if we are unable to fund our continuing losses, you could lose all or part of
your investment.



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If we do not raise additional capital, we may be forced to further delay; reduce or eliminate our
development programs or commercialization efforts.

We have deferred further clinical development of Qutenza, NGX-1998 and our other
development programs until such time as additional capital is available. Our future capital requirements will depend on, and could increase significantly as a result of, many factors, including:



| |  |  | the costs and timing of regulatory approval;
| | - |  | --------------------------------------------



| |  |  | the costs of establishing or contracting for sales and marketing capabilities;
| | - |  | ------------------------------------------------------------------------------



| |  |  | the need to conduct additional clinical trials;
| | - |  | -----------------------------------------------



| |  |  | the rate of progress and cost of our clinical trials and other development activities;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the effect of competing technological and market developments;
| | - |  | --------------------------------------------------------------



| |  |  | the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | the extent to which we acquire or in-license new products, technologies or businesses.
| | - |  | --------------------------------------------------------------------------------------

We intend to seek additional funding through strategic alliances, debt facilities or other financing vehicles which may include the public or private
sales of our equity securities. There can be no assurance, however, that additional funding will be available on reasonable terms, if at all. If adequate funds are not available, we may be required to further delay, reduce the scope of, or eliminate
one or more of our planned development, commercialization or expansion activities.

Raising additional funds by issuing securities or
through licensing arrangements may cause dilution to existing stockholders, restrict our operations or require us to relinquish proprietary rights.

To the extent that we raise additional capital by issuing equity securities, our existing stockholders ownership will be diluted. Any debt financing we enter into may involve covenants that restrict our
operations. These restrictive covenants may include limitations on additional borrowing and specific restrictions on the use of our assets, as well as prohibitions on our ability to create liens, pay dividends, redeem our stock or make investments.
In addition, if we raise additional funds through licensing arrangements, it may be necessary to relinquish potentially valuable rights to our potential products or proprietary technologies, or grant licenses on terms that are not favorable to us.

Risks Related to our Intellectual Property

The commercial success, if any, of Qutenza depends, in part, on the rights we have under certain patents.

The
commercial success, if any, of Qutenza depends, in part, on a device patent granted in the United States and device patents granted in Canada, Hong Kong and certain countries of Europe concerning the use of a dermal patch for high-concentration
capsaicin delivery for the treatment of neuropathic pain. We exclusively license these patents from the University of California. We do not currently own, and do not have rights under this license to any issued patents that cover Qutenza outside
Europe, Hong Kong, Canada and the United States. One or more of the inventors named in the method patent described below may assert a claim



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of inventorship rights to such patent, which may 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 to other patents and patent applications which have been licensed under our agreements with third party manufacturers,
including the issued patents and pending applications licensed under our commercial supply agreement for Qutenza, we also license a method patent granted in the United States from the University of California concerning the delivery of
high-concentration capsaicin for the treatment of neuropathic pain. 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, a company focused on the development and commercialization of treatments for pain, including injection or infiltration of capsaicin for post-surgical pain, osteoarthritis or interdigital neuroma, has licensed from one of the
non-assigning inventors the right to use the technology under the method patent. There can be no assurances that other entities will not similarly obtain rights to use the technology under the method patent. If other entities license the right to
use this patent, we may face more products competitive with Qutenza and our business will suffer.

If we are unable to maintain and
enforce our proprietary rights, we may not be able to compete effectively or operate profitably.

Our commercial success will
depend, in part, on obtaining and maintaining patent protection, trade secret protection and regulatory protection (such as Hatch-Waxman protection or orphan drug designation) of our proprietary technology and information as well as successfully
defending against third-party challenges to our proprietary technology and information. We will be able to protect our proprietary technology and information from use by third parties only to the extent that valid and enforceable patents, trade
secrets or regulatory protection cover them and we have exclusive rights to utilize them.

Our commercial success will continue to depend
in part on the patent rights we own, the patent rights we have licensed, the patent rights of our collaborators and suppliers and the patent rights we may obtain related to future products we may market. Our success also depends on our and our
licensors, collaborators and suppliers ability to maintain these patent rights against third-party challenges to their validity, scope or enforceability. Further, we do not fully control the patent prosecution of our licensed
patent applications. There is a risk that our licensors will not devote the same resources or attention to the prosecution of the licensed patent applications as we would if we controlled the prosecution of the patent applications, and the resulting
patent protection, if any, may not be as strong or comprehensive as if we had prosecuted the applications ourselves.

The patent positions
of biopharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in such companies
patents has emerged to date in the United States. The patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States or other countries may diminish the
value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. For example:



| |  |  | we or our licensors might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we or our licensors might not have been the first to file patent applications for these inventions;
| | - |  | ---------------------------------------------------------------------------------------------------



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| |  |  | others may independently develop similar or alternative technologies or duplicate any of our technologies;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | it is possible that none of our pending patent applications or the pending patent applications of our licensors will result in issued patents;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our issued patents and the issued patents of our licensors may not provide a basis for commercially viable products, or may not provide us with any competitive
advantages, or may be challenged and invalidated by third parties;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may not develop additional proprietary technologies or product candidates that are patentable; or
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | the patents of others may have an adverse effect on our business.
| | - |  | -----------------------------------------------------------------

We also rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While we seek to protect
confidential information, in part, by confidentiality agreements with our employees, consultants, contractors, or scientific and other advisors, they may unintentionally or willfully disclose our information to competitors. If we were to enforce a
claim that a third party had illegally obtained and was using our trade secrets, it would be expensive and time consuming, and the outcome would be unpredictable. In addition, courts outside the United States are sometimes less willing to protect
trade secrets.

If we are not able to defend the patent or trade secret protection position of our technologies and product candidates,
then we will not be able to exclude competitors from developing or marketing competing products, and we may not generate enough revenue from product sales to justify the cost of development of our product candidates and to achieve or maintain
profitability.

If we are sued for infringing intellectual property rights of other parties, such litigation will be costly and time
consuming, and an unfavorable outcome would have a significant adverse effect on our business.

Although we believe that we would
have valid defenses to allegations that our current product candidates, production methods and other activities infringe the valid and enforceable intellectual property rights of any third parties of which we are aware, we cannot be certain that a
third party will not challenge our position in the future. Other parties may own patent rights that might be infringed by our products or other activities. For example, in June 2005, Winston Laboratories sent us a letter informing us of their
U.S. patent related to cis-capsaicin, and suggested that our synthetic capsaicin formulation could infringe this patent. We responded in August 2005 by denying any infringement. In 2007, Winston reiterated its claim and offered to
discuss a license to its patent. We responded by denying infringement. We believe that our products, if commercialized, will not infringe the Winston patent, which is due to expire in 2009, but may be extended under certain circumstances. There has
been, and we believe that there will continue to be, significant litigation and demands for licenses in our industry regarding patent and other intellectual property rights. Our competitors or other patent holders may assert that our products and
the methods we employ are covered by their patents. These parties could bring claims against us that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages or possibly prevent us from
commercializing our product candidates. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the
suit.



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As a result of patent infringement claims, or in order to avoid potential claims, we may choose to seek,
or be required to seek, a license from the third party and would most likely be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we were able to obtain a license, the
rights may be non-exclusive, which would give our competitors access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations if, as a result of
actual or threatened patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable terms. This could harm our business significantly.

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.

The cost to us of any litigation or other proceedings relating to intellectual property rights, even if resolved in our favor, could be
substantial. Some of our potential competitors may be better able to sustain the costs of complex patent litigation because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of any litigation
could have a material adverse effect on our ability to continue our operations. Should third parties file patent applications, or be issued patents claiming technology also claimed by us in pending applications, we may be required to participate in
interference proceedings in the U.S. Patent and Trademark Office to determine priority of invention which could result in substantial costs to us or an adverse decision as to the priority of our inventions. An unfavorable outcome in an interference
proceeding could require us to cease using the technology or to license rights from prevailing third parties. There is no guarantee that any prevailing party would offer us a license or that we could acquire any license made available to us on
commercially acceptable terms.

If we fail to comply with our obligations in the agreements under which we license development or
commercialization rights to products or technology from third parties, we could lose license rights that are important to our business.

We are a party to a number of technology licenses that are important to our business and expect to enter into additional licenses in the future. For example, we hold licenses from The University of California and LTS Lohmann
Therapie-Systeme AG under patents and patent applications relating to Qutenza, our lead product candidate. These licenses impose various commercialization, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with
these obligations, the licensor may have the right to terminate the license, in which event we would not be able to market products covered by the license, including Qutenza.

We may be subject to damages resulting from claims that our employees or we have wrongfully used or disclosed alleged trade secrets of their former
employers.

Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies,
including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary
information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of
key research personnel or their work product could hamper or prevent our ability to commercialize certain potential products, which could severely harm our business. Even if we are successful in defending against these claims, litigation could
result in substantial costs and be a distraction to management.



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Risks Related to an Investment in our Common Stock

We expect that our stock price will fluctuate significantly, and you may not be able to resell your shares at or above your investment price.

The stock market has experienced significant volatility, particularly with respect to pharmaceutical, biotechnology and other life
sciences company stocks. The volatility of pharmaceutical, biotechnology and other life sciences company stocks often does not relate to the operating performance of the companies represented by the stock. Factors that could cause volatility in the
market price of our common stock include, but are not limited to:



| |  |  | potential inability to preserve or raise sufficient capital to maintain our operations;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | delays in the process of seeking or our ability to obtain regulatory approvals;
| | - |  | -------------------------------------------------------------------------------



| |  |  | delay in entering, or termination of, strategic partnership relationships;
| | - |  | --------------------------------------------------------------------------



| |  |  | general economic conditions and slow or negative growth of our expected markets;
| | - |  | --------------------------------------------------------------------------------



| |  |  | third-party healthcare reimbursement policies or determinations;
| | - |  | ----------------------------------------------------------------



| |  |  | failure to meet market expectations with respect to potential product launch timing;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | failure or delays in entering additional product candidates into clinical trials or in commencing additional clinical trials for current product candidates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | results from and any delays related to the clinical trials for our product candidates;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | our ability to develop and market new and enhanced product candidates on a timely basis;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | announcements by us or our collaborators or competitors of new commercial products, clinical progress or the lack thereof, significant contracts, commercial
relationships or capital commitments;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | issuance of new or changed securities analysts reports or recommendations for our stock or the discontinuation of one or more securities analysts
research coverage for our stock;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | failure to meet revenue estimates and revenue growth rates;
| | - |  | -----------------------------------------------------------



| |  |  | actual or anticipated quarterly variations in our results of operations or those of our collaborators or competitors;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | developments or disputes concerning our intellectual property or other proprietary rights;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | commencement of, or our involvement in, litigation;
| | - |  | ---------------------------------------------------



| |  |  | changes in governmental regulations or in the status of our regulatory approvals;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | market conditions in the life sciences sector; and
| | - |  | --------------------------------------------------



| |  |  | any major change in our board or management.
| | - |  | --------------------------------------------



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If we fail to meet the requirements for continued listing on the NASDAQ Global Market and do not
meet initial listing requirements to transfer to the NASDAQ Capital Market, our common stock could be delisted from trading, which would adversely affect the liquidity of our common stock and our ability to raise additional capital.

Our common stock is currently listed on the NASDAQ Global Market and to maintain our listing, we must meet certain financial
requirements in accordance with the rules of the NASDAQ Stock Market LLC, or Nasdaq, including, but not limited to, the requirement to maintain a minimum closing bid price of at least $1.00 per share for our common stock and certain other
quantitative standards. Although we have maintained our listing status on the NASDAQ Global Market since our initial listing on May 2, 2007, and despite Nasdaq suspending minimum bid price and certain other requirements until July 20,
2009, there can be no assurance that we will maintain our listing on this market in the future if our bid price deteriorates or if we fail to meet other requirements. If we are delisted from the NASDAQ Global Market, we can apply to be listed on the
NASDAQ Capital Market or other exchanges, which generally have lower standards for listing. Any potential delisting of our common stock would adversely affect the liquidity of our common stock and our ability to raise additional capital.

We will continue to incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public
companies, which could affect our operating results.

As a public company, we will continue to incur significant legal, accounting
and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with corporate governance requirements, including
requirements under the Sarbanes-Oxley Act, as well as new rules implemented by the Securities and Exchange Commission and the NASDAQ Stock Market LLC. We expect these rules and regulations to increase our legal and financial compliance costs and to
make some activities more time-consuming and costly.

If the ownership of our common stock continues to be highly concentrated, it
may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause our stock price to decline.

Our executive officers, directors and their affiliates and 5% stockholders beneficially own or control approximately 71% of the outstanding shares of our
common stock as of March 31, 2009 (after giving effect to the exercise of all of their outstanding vested options and warrants exercisable within 60 days of such date). Accordingly, these executive officers, directors and their affiliates and
significant stockholders acting as a group, will have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of
our assets or any other significant corporate transactions. These stockholders may also delay or prevent a change of control of us, even if such a change of control would benefit our other stockholders. The significant concentration of stock
ownership may adversely affect the trading price of our common stock due to investors perception that conflicts of interest may exist or arise.

Future sales of shares by existing stockholders could cause our stock price to decline.

The
market price of our common stock could decline as a result of sales by our existing stockholders, including sales by our executive officers, of shares of common stock in the market, or the perception that these sales could occur. These sales might
also make it more difficult for us to sell equity securities at a time and price that we deem appropriate.



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Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition
of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our certificate of incorporation and bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include a classified board of directors, a prohibition on actions by
written consent of our stockholders and the ability of our board of directors to issue preferred stock without stockholder approval. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the
Delaware General Corporation Law, which prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Although we believe these provisions collectively provide for an opportunity to receive higher
bids by requiring potential acquirors to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our
stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

Recent events in the credit markets have, and will continue to, impact our investment returns.

As a result of recent events in the credit markets, we have been converting, over time, all of our investment holdings into U.S. Treasury securities and
those corporate securities that are fully backed by the United States Government. As a result of the credit crisis and our shift in investments, we anticipate that our investment returns will be below our historic rates of return. These lower
returns will likely continue for some time and we cannot predict when market conditions will improve and when higher yielding investment options may be available to us.

We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.

We have paid no cash dividends on any of our classes of capital stock to date, have contractual restrictions against paying cash dividends and currently
intend to retain our future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be an investors sole source of gain for the foreseeable future.



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##### Table of Contents

|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

None.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

None.



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|ITEM 6. | EXHIBITS
|------- | --------



|              |  |                                                                                                                                                                          
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                                                                                                                                      
|              | 
|3.1 (1)       |  | Amended and Restated Certificate of Incorporation.                                                                                                                       
|              | 
|3.2 (1)       |  | Amended and Restated Bylaws.                                                                                                                                             
|              | 
|4.1 (1)       |  | Specimen Common Stock Certificate.                                                                                                                                       
|              | 
|4.2 (1)       |  | Third Amended and Restated Investors Rights Agreement by and between NeurogesX, Inc. and certain stockholders, dated as of November 14, 2005.                           
|              | 
|4.3 (2)       |  | Amendment No. 1 to the Third Amended and Restated Investors Rights Agreement by and between NeurogesX, Inc. and certain stockholders, dated as of December 28, 2007.    
|              | 
|4.4 (1)       |  | Warrant to Purchase Series A Preferred Stock by and between NeurogesX, Inc. and Silicon Valley Bank, dated as of December 14, 2000.                                      
|              | 
|4.5 (1)       |  | Warrant to Purchase Series B Preferred Stock by and between NeurogesX, Inc. and Silicon Valley Bank, dated as of May 1, 2002.                                            
|              | 
|4.6 (1)       |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between NeurogesX, Inc. and Horizon Technology Funding Company II LLC, dated as of July 7, 2006.          
|              | 
|4.7 (1)       |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between NeurogesX, Inc. and Horizon Technology Funding Company III LLC, dated as of July 7, 2006.         
|              | 
|4.8 (1)       |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between NeurogesX, Inc. and Oxford Finance Corporation, dated as of July 7, 2006.                         
|              | 
|4.9 (1)       |  | Form of First Warrant to Purchase Series C2 Preferred Stock.                                                                                                             
|              | 
|4.10 (1)      |  | Form of Second Warrant to Purchase Series C2 Preferred Stock.                                                                                                            
|              | 
|4.11 (2)      |  | Registration Rights Agreement by and between NeurogesX, Inc. and certain investors, dated as of December 23, 2007.                                                       
|              | 
|4.12 (2)      |  | Form of Warrant to Purchase Common Stock.                                                                                                                                
|              | 
|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          |  | Certifications of the Principal Executive Officer and the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).



|(1) | Incorporated by reference from our registration statement on Form S-1, registration number 333-140501, declared effective by the Securities and Exchange Commission on May 1,
2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 28, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURES

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



|                   |  |  |  |                                                                                          
|------------------ |  |  |  | -----------------------------------------------------------------------------------------
|Dated: May 8, 2009 |  |  |  | NEUROGESX, INC. (Registrant)                                                             
|                   |  | 
|                   |  |  |  | /s/ Anthony A. DiTonno                                                                   
|                   |  |  |  | Anthony A. DiTonno President and Chief Executive
Officer (Principal Executive Officer)   
|                   |  | 
|                   |  |  |  | /s/ Stephen F. Ghiglieri                                                                 
|                   |  |  |  | Stephen F. Ghiglieri Chief Financial
Officer (Principal Financial and Accounting Officer)



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EXHIBIT INDEX



|              |  |                                                                                                                                                                          
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                                                                                                                                      
|              | 
|3.1 (1)       |  | Amended and Restated Certificate of Incorporation.                                                                                                                       
|              | 
|3.2 (1)       |  | Amended and Restated Bylaws.                                                                                                                                             
|              | 
|4.1 (1)       |  | Specimen Common Stock Certificate.                                                                                                                                       
|              | 
|4.2 (1)       |  | Third Amended and Restated Investors Rights Agreement by and between NeurogesX, Inc. and certain stockholders, dated as of November 14, 2005.                           
|              | 
|4.3 (2)       |  | Amendment No. 1 to the Third Amended and Restated Investors Rights Agreement by and between NeurogesX, Inc. and certain stockholders, dated as of December 28, 2007.    
|              | 
|4.4 (1)       |  | Warrant to Purchase Series A Preferred Stock by and between NeurogesX, Inc. and Silicon Valley Bank, dated as of December 14, 2000.                                      
|              | 
|4.5 (1)       |  | Warrant to Purchase Series B Preferred Stock by and between NeurogesX, Inc. and Silicon Valley Bank, dated as of May 1, 2002.                                            
|              | 
|4.6 (1)       |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between NeurogesX, Inc. and Horizon Technology Funding Company II LLC, dated as of July 7, 2006.          
|              | 
|4.7 (1)       |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between NeurogesX, Inc. and Horizon Technology Funding Company III LLC, dated as of July 7, 2006.         
|              | 
|4.8 (1)       |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between NeurogesX, Inc. and Oxford Finance Corporation, dated as of July 7, 2006.                         
|              | 
|4.9 (1)       |  | Form of First Warrant to Purchase Series C2 Preferred Stock.                                                                                                             
|              | 
|4.10 (1)      |  | Form of Second Warrant to Purchase Series C2 Preferred Stock.                                                                                                            
|              | 
|4.11 (2)      |  | Registration Rights Agreement by and between NeurogesX, Inc. and certain investors, dated as of December 23, 2007.                                                       
|              | 
|4.12 (2)      |  | Form of Warrant to Purchase Common Stock.                                                                                                                                
|              | 
|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          |  | Certifications of the Principal Executive Officer and the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).



|(1) | Incorporated by reference from our registration statement on Form S-1, registration number 333-140501, declared effective by the Securities and Exchange Commission on May 1,
2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 28, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------



43